Historically, equity is one asset class that has generated inflation-beating returns over long time-frames. However, most investors do not have the time or knowledge to create an ideal equity portfolio that matches their risk appetite and generates the desired returns. For this investor class mutual funds are the best and safest way to get exposure to equity markets. Market risk is better managed by investing through mutual funds, as these funds are well diversified and managed by a team of qualified professionals. Historically mutual funds have provided 12% to 15% return per annum, which means that that if money is invested now in one of these funds at 15% annual return rate, the initial investment kitty would double in size after a few years.
Currently Indian equity markets are going through a volatile phase as we are in a pre-election time and there are just a few months left for the general election. The broader markets have underperformed this year compared to the solid performance in the previous years. This kind of market performance is confusing to an ordinary investor. Obviously, it is not advisable to enter the markets when they are at their peaks. However, it is equally true that it is near impossible to pick a market top or a market bottom. Irrespective of the market conditions, one can go ahead with his investment in mutual funds to achieve long-term financial goals.
To create an ideal mutual fund portfolio with a long-term outlook, there are several factors that need to be considered. Individual risk tolerance and desired returns should match with the investment objective and style of the chosen mutual fund. Historical performance is another critical aspect that helps one understand if the fund’s returns are consistent with its investment thesis. Good historical performance establishes a solid track record and infuses confidence in one’s investment decision. Past performance is a good proxy to gauge the fund manager’s expertise. However, one should also be mindful about the fund manager’s profile and his tenure at a particular AMC as it can directly be correlated with the mutual fund’s return. Similarly, expense ratio and exit load are other important criterions that should be considered before investing in mutual funds. Typically one should pick funds with low expense ratio and exit load.
An ideal mutual fund portfolio should be well diversified. Investment in mutual funds with varying investment styles thus adds the necessary diversification in a mutual fund portfolio. Large cap funds provide the necessary anchor that a portfolio needs, whereas the midcap and small cap funds are needed to maximize returns. Some amount of debt mutual funds provides the necessary safety cushion against market volatility. Keeping all this in mind, we have carefully chosen a list of mutual funds that are well managed and have provided superior results over the longer term. The list includes blue chip funds, small cap midcap funds and some debt funds.
Below is a brief description on each of the fund that we have selected. We have also tabulated the historical results of these funds for clarity and ease of understanding:
Axis Bluechip Fund has emerged as one of 2018’s top-performing large cap funds. Its outperformance is impressive considering the widespread failure of actively managed funds in the year gone by. Axis Bluechip Fund not only matched the benchmark, but surpassed it. Its performance also holds good over a longer time period.
With a track record of over 15 years, Birla SL Frontline Equity Fund has been one of the most consistent performers which gives your investments valuable nourishment by investing in some of the fast growing Indian industries and ensures good returns. This plan is best for those who are seeking long-term capital growth in equity.
The MF scheme seeks to generate capital appreciation by investing in a diversified portfolio of large and mid-cap stocks. This mutual fund has given highest returns of 17% annualized return since inception and 13.7% annualized returns in the last 5 years.
Axis Mid-cap Fund has managed huge outperformance relative to index over the past one year with 4.6% returns, even as most peers struggled to deliver positive returns. With a 5-year return of 20.8%, this mutual fund has outperformed both the index and the category average by a good margin. The fund has built a healthy track record of outperformance since inception.
This fund has given a whopping return since its inception which is very impressive. HDFC Small-Cap Fund focuses on generating superior returns despite the high risks by investing in smaller or less significant capitalisation companies. It has given returns of 19.3% in the last 5 years comfortably beating the Nifty SmallCap.
This mutual fund scheme gave 22% annualized returns in the last 5 years and 14.2% annualized returns in the last 3 years. Infra mutual funds have not been performing well in the last 1 year. However, we expect that it would turn positive in the coming months. Since this is sector fund that invests in the infra sector, it is suitable only for high-risk investors.
Kotak Standard Multicap Fund has consistently outperformed its benchmark index and category average since its launch on September 11, 2009. This mutual fund has given 18.7% annualized returns during the last 5 years and 16.1% during the last 3 years.
Mirae Asset India Equity Fund (formerly Mirae Asset India Opportunities Fund) is the flagship scheme of Mirae AMC, and the scheme that has brought fame to the AMC. It has delivered a whopping 18.5% over the past 5 years. The fund is also fairly diversified with as many as 61 stocks. Relatively cautious equity investors will find themselves well taken care of in this fund.
Axis Liquid Fund is one of the top-performing liquid funds that has given returns of around 7.8% over the last 5 years – which is a good return. Even in the last year, the rate of return is much higher than what you’d get from a savings account.
Franklin India Low Duration fund is an ultra-short term fund. It has given a very high return of 9.3% over the last 5 years and 8.8% in the last 1 year. It is ideal for investing for a period of a few months to a year.
The mutual funds that are listed above are ideal choices for a diversified mutual fund portfolio. The list comprises Blue-chip funds for stable returns, some midcap names that are growth-oriented and some debt funds. These funds are among the best in their class. Investors are advised to consider this list as a starting point and analyze their individual situation and their risk-reward preference before making any investment decisions.
(By Rahul Agarwal, Director, Wealth Discovery/EZ Wealth)
(Disclaimer: These are the views of the author. Readers are advised to consult their financial advisor before making any investment)