The average 10-year return of equity large-cap mutual fund category is about 7.5 per cent, while for the mid-cap MF category it is nearly 10 per cent.
Mutual Fund Investments: A majority of investors invest in equities to save for a long-term financial goal. That is largely because several studies done in the past have shown that equities have the potential to generate high inflation-adjusted return among different asset classes such as real estate, gold and debt. However, the real picture, as it stands today is this – The average 10-year return of equity large-cap mutual fund category is about 7.5 per cent, while for the mid-cap MF category it is nearly 10 per cent. But, these are point-to-point return as on April 12, 2020 while the rolling returns could be different from it.
For a long term investor, the market is also providing with an opportunity to buy at lower prices. The risk still exists as the markets may slide even further from current levels. In addition to large-cap and mid-cap mutual fund schemes, there are equity funds of unit-linked insurance plans (Ulip) also available for an investor. Ulip, however, is a combo of insurance and investment and, therefore, suit those who are unable to keep them separate. The average 10-year Ulip return for large-caps has been about 6.3 per cent, while it is nearly 7.3 per cent for mid-cap Ulip funds over the same period.
So, should one be more bullish on large-cap funds compared to mid or small-cap funds now? “We continue to be more positive on large-caps amidst this correction, and suggest a higher allocation there. Mid-cap valuations are relatively cheaper, and we also suggest partial allocation there. But investors should note that in a market correction or economic slowdown, earnings growth of small or mid-cap companies is generally hit harder—so we may see relatively higher volatility in the small or mid-cap segment in the short term,” says Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life.
And, what about Ulip policyholders who wish to save with a long-term perspective. “ ULIPs typically have a longer-term orientation (5 year lock-in period) and help investors in achieving their medium to long term financial goals. ULIPs have various tax advantages (due to their long-term nature), and regulations have also made cost (expense ratio) of new-age ULIPs quite competitive,” informs Reddy.
Ulips, under the present tax laws, do carry certain advantage as well. “Under Section 10(10)D of the Income-tax Act, the maturity proceeds or sum assured of an insurance policy is tax-free, provided the sum assured is 10 times or more of the annual premium. Also, you can get exemption up to Rs. 1.5 lakh under section 80C of the IT act,” adds Reddy.
There are different fund options representing different asset class within a single Ulip scheme. Switching amongst them is tax-free and there is no exit load either irrespective of holding period. Reddy says, “Another unique advantage of a new-age ULIP is that within the product, the investor can switch between various funds option (equity, debt, liquid fund etc.) without any capital gains tax incidence, and can switch as many times–without any additional charges or any exit load. This helps an investor to plan their asset allocation in a more efficient and tax-friendly manner, depending on market conditions and outlook.”
However, rather than investing on an ad-hoc basis to take benefit of the current market situation may not be the right approach. One needs to have a proper asset allocation plan in place with adequate diversification across asset classes and not just schemes based on market-capitalization, industries, geographies etc. And most importantly, have a de-risking plan in place before you reach your goal to enjoy the corpus accumulated over the years.