Has your equity fund earned returns?

3 MinsMarch 03, 2020

It is tough to predict returns from any market-linked investment, including equity-linked mutual funds. You could track the past performance of the fund and evaluate the portfolio to know the quality of stocks the fund has invested in.

In addition, you can also track indices to which the fund is benchmarked against, to get an idea of its performance. For instance, the S&P BSE Sensex or the Nifty 50 for multi-cap funds, other sector specific or market-cap specific index depending on which fund you hold.

equity fund

But there are times when the performance of a particular mutual fund scheme fund is significantly different from the performance of the benchmark. At times, there could be a wide divergence between the returns generated by the top performing and worst-performing fund in a particular category. In a positive market this difference may not seem substantial as most schemes would be able to generate good returns. But the difference could be more pronounced in a volatile or lacklustre market.

For instance, in 2019, the S&P BSE Sensex crossed 41,000 levels, generating an absolute returns of over 14.4%. But not all types of equity-oriented schemes generated wealth for investors. Out of 210 open-ended diversified equity-oriented mutual fund schemes, 184 schemes generated positive absolute returns, while only 104 managed to generate ‘alpha’, i.e., beat the benchmark index. Further, there was a notable difference in the best -performing and worst-performing equity-oriented mutual funds.

So, a point to note is that not all mutual schemes have been best at generating wealth for investors, and hence, scheme selection based on each one’s risk profile, broader investment objectives, and the investment time horizon plays a pivotal role.

Moreover, past quantitative performance is not indicative of future returns. Therefore, while considering equity-oriented mutual fund schemes for wealth creation, along with just the past returns of specific time period/s, also pay attention to the performance across market cycles, risk exposure level of fund, the risk-adjusted return clocked, and evaluate a scheme on a host of qualitative aspects as well. It is not necessary that the best-performing equity mutual fund scheme will continue to display stellar performance year-after-year. Hence, it becomes imperative to look for a mutual fund scheme that is a consistent performer across time frames, market cycles, and timely review your mutual fund portfolio for it to prove rewarding in the long run.

Also Read [Types of Mutual Funds]

The equity markets will continue to remain volatile; it is very nature of the equity market. But how you use this integral volatility to your advantage by perceiving the situation sensibly, set and adjust your asset allocation, and then choose appropriate investment avenues, determines your investment success. Also, following a disciplined investment approach is essential.

Some tips while selecting equity mutual funds:

  • Stagger the lump sum investments and invest through Systematic Investment Plans.
  • If you have existing SIPs, do not discontinue them if the mutual fund scheme is performing consistently well.
  • Diversify across market capitalisation via multi-cap funds, while holding some proportion of your equity allocation in large-cap funds as well as mid-cap funds.
  • Large caps are established names and provide stability to your portfolio. Therefore, they should be a part of your core portfolio and the holding period should be at least 3 years.
  • Mid-cap funds can be a part of your satellite portfolio to clock high returns provided the investment time horizon is over 5 years.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author 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

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply