There is a wide choice before investors. Diversified equity funds are divided into four major categories. There are large-cap funds which invest primarily in large-cap stocks. These suit investors looking for stable returns. In the past 10 years, the large-cap category has beaten the Nifty by a thin margin of 78 basis points (100 basis points are equal to one percentage point). The funds in our list have outperformed the Nifty by an average 445 basis points.
Then there are mid-cap funds which carry higher risk but can also be very rewarding in the long term. The risk quotient rises significantly in small-cap funds, but so do the returns. The top small-cap funds have generated over 40% annualised returns in the past three years. Investors should ideally go for the multi-cap funds that are not confined to any segment and invest across market capitalisations. These go-anywhere funds have been the best performers in the long run. Hyderabad-based Harsh Sharma (see picture) invests `12,000 a month in a mix of equity, debt and gold funds for very long-term goals that include his newborn child’s education and marriage and his own retirement.
Why invest in mutual funds?
Many investors believe they can do better than mutual funds. They believe they can pick multibagger stocks and earn higher returns than a diversified basket of stocks. But picking stocks is not easy, especially when it comes to smalland mid-caps. A study by brokerage firm Motilal Oswal shows that between 2010 and 2015, only 24 of the 200 mid-cap stocks clocked 33% CAGR to become mega-caps. Another 88 grew at a compounded rate of 9% and stayed in the same segment, while another 88 destroyed wealth and moved into the minicap segment.
However, many Indian investors still think they can pick stocks better than professional fund managers. Individuals hold 22% of the total market capitalisation through direct stocks investments and only 4.5% through equity mutual funds.
Investing in large-caps stocks directly but relies on mutual funds to invest in small-caps. Hold blue-chip stocks such as L&T, HDFC Bank and ITC in his portfolio but has also invested in small-cap funds such as ICICI Pru Discovery Fund and Franklin India Smaller Companies Fund. Both funds have delivered good returns for him. If you do not have knowledge but want to invest in smalland mid-cap stocks, it is best to invest through a smallor midcap mutual fund.
As we have often said, the SIP mode is the best way to invest in equity mutual funds. But this does not mean you stop monitoring your investments. SIPs are like the auto cruise function in a car. You can relax but still need to watch out for any pothole or sharp turn in the road.