7 Mins July 8, 2022
If you have long-term financial goals to address, your investment horizon is at least 3 to 5 years, and you have a high-risk appetite, investing in equity mutual funds is the best option for you.
Broadly, equity mutual funds could be open-ended (i.e., available for purchase, transfer and redemption throughout the year without a fixed maturity period; perpetual in nature) or close-ended (i.e., open for investment only during the initial
offer period with a fixed maturity period). Ideally, open-ended funds should be your preferred option as they offer better liquidity and have a lower expense ratio.
Given below are the sub-categories of equity mutual funds as defined by SEBI:
1) Large-cap Funds – They primarily invest (minimum 80%) in large established companies, i.e., the top 100 companies, on a full market capitalisation basis.
2) Large & Mid-cap Funds– Offering exposure to both large-cap and mid-cap stocks by investing a minimum of 35% investment each in equity and equity-related instruments of large-cap and mid-cap companies respectively.
3) Mid-cap Funds – Investing at least 65% in medium-sized companies, i.e., companies from the 101st to the 250th on a full market capitalisation basis.
4) Small-cap Funds– Investing 65% in small-sized companies, i.e., from the 251st company onwards on a full market capitalisation basis.
5) Multi-cap Funds– They invest in a mix of large, mid, and small-sized companies, with at least 25% in each segment. Plus, they are required to maintain this minimum allocation regardless of the market conditions.
6) Flexi-cap Funds– Investing a minimum of 65% of their assets in equity and equity-related instruments with dynamic allocation across large-cap, mid-cap, and small-cap stocks. So, there is flexibility to increase allocation
to a particular market cap segment by evaluating the opportunities available.
7) Dividend Yield Funds– Investing mainly (at least 65%) in dividend-yielding stocks, which could be from any market capitalisation segment.
8) Value/Contra Funds– These are schemes pursuing a value/contrarian investment strategy by maintaining at least 65% exposure to equities.
9) Focused Funds – Where the focus is on holding a small number of stocks (maximum 30) -- which may be from across market cap segments -- while investing 65% in equities. So, in a sense, a concentrated portfolio is held
with high conviction bets.
10) Sector/Thematic Funds – Investing mainly in companies from one particular sector or theme with a minimum of 80% exposure to such equities.
11) Equity Linked Saving Schemes (ELSS)– Also known as Tax-saving Mutual Funds, these offer a tax benefit under Section 80C of the Income Tax Act, 1961 for a maximum investment of up to Rs 1.5 lakh. They are subject to a
lock-in of 3 years. ELSS invests a minimum of 80% in equity and equity-related instruments.
[Also Read: Include a mix of asset classes in your investment portfolio]
Each sub-category has its own distinct characteristics and investment objective. That said, the broader and primary objective of equity funds is to provide long-term capital appreciation. They are best suited to address your long-term financial
goals. That said, they need to be in congruence with your personal risk profile and time horizon.
So, for example, if you are a very high-risk taker and have a time horizon of 7-8 years or more, you may consider mid-cap funds and small-cap funds.
Alternatively, if you are not a high risk-taker but are looking for stability, then choose large-cap funds and/or dividend yield funds. Large-caps companies are well-established, have more resources and are usually less volatile than their mid
and small cap counterparts.
Similarly, if you want to achieve the dual objective of tax-saving and wealth creation, then ELSS is a worthwhile option for you.
Factors to consider when selecting a mutual fund:
- Returns over various time frames (6-months, 1-year, 2-year, 3-year, 5-year, 10-year, since inception)
- Performance across market phases (i.e., bull and bear phases)
- Risk ratios (Standard Deviation, Sharpe, Sortino, etc.)
- The expense ratio of the scheme
- Portfolio characteristics - the top-10 holdings, top-5 sector exposure, portfolio concentration and diversification, market capitalisation bias, investing style (value, growth, or blend) and portfolio turnover amongst others.
- The quality of the fund management team (the experience of the fund manager, the number of schemes he/she manages, the track record of the mutual fund schemes under his/her watch, the experience of the research team, etc.).
- The investment processes and systems followed at the fund house.
When investing in mutual funds, you could either invest a lump sum or take the Systematic Investment Plan (SIP) route.The SIP route will facilitate rupee-cost averaging and potentially compound
wealth in the long run while you endeavour to achieve the envisioned long-term financial goals. You can select a mutual fund scheme best suited to your needs online.
Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision