Equity mutual funds invest primarily in stocks of several companies. As per the Securities and Exchange Board of India
(SEBI), if a fund invests 65% or more of its portfolio in equities, then it is classified as an equity-oriented fund.
This article on best equity mutual funds covers the following:
1. What are Best Equity Mutual Funds?
The equity mutual funds
invest at least 65% of their portfolio in stocks. Equity funds can be managed actively or passively. Best equity mutual funds offer excellent returns over a medium to long-term horizon
Since equity funds predominantly invest in stocks, they are typically considered much risky than debt and hybrid funds. The fund value often experiences frequent fluctuations. Due to this, only the best equity mutual funds are preferred by aggressive investors.
As equity funds are risky bets, you need to analyse various parameters before choosing to invest in a particular fund.
2. Who should invest in Best Equity Mutual Funds?
You should consider your risk appetite and investment horizon while investing in equity funds. These funds are suitable for an investor having an investment horizon of say five years or more. Hence, short-term investors should refrain from investing in equity mutual funds.
If saving taxes is on your mind, then you can invest in ELSS
, it is regarded as the best option under Section 80C of the Income Tax Act, 1961
. ELSS has the shortest lock-in period of three years. Moreover, it offers a much higher return than other investments covered under Section 80C.
A budding mutual fund investor may choose to invest in large-cap equity funds as these funds invest in equity shares of well-established companies that have a track record of offering stable returns in the long run. Conversely, an experienced investor may choose to invest in diversified equity funds to get the best combination of risk and return.
3. Things to consider as an investor
a. Fund Objectives
Best equity mutual funds aim at accumulating wealth through strategic investments. The stock picking is based on investing style, which can be value investing or growth investing. Value investing involves picking undervalued stocks whose price will rise, eventually leading to a profit.
b. Fund Types
Equity funds are further divided into purely large-caps/mid-caps/small-cap funds. Small-cap funds and mid-cap funds have high risk-high return potential than large-cap mutual funds. Then there are multi-cap funds, which invest across stocks of all market capitalisations to maintain an optimally diversified portfolio.
Equity funds face market risk, which happens to be the most significant one. The equity funds are affected by the movements of an underlying benchmark like Nifty or Sensex. The overall rise and fall in the index lead to the fluctuations in the value of equity funds. Such volatility is higher than that experienced by debt funds or money market funds.
Equity funds charge an expense ratio to manage your investment. SEBI has mandated the upper limit of expense ratio to be 1.05%. Actively-managed equity funds have a higher expense ratio as compared to index funds.
e. Investment Horizon
Equity funds are suitable for individuals who are having a long-term investment horizon. Usually, the fund experiences a lot of fluctuations during the short-run. This fluctuation averages out in the long-run of say, more than five years.
The fund is, thus, able to give returns in the range of 10%-12%. Those who choose best equity mutual funds need to be prepared to stick around for at least for the said period to enable the fund to realise its full potential.
f. Financial Goals
Investing in equity mutual funds is ideal for achieving long-term financial goals, such as wealth creation or retirement planning. Being a high-risk and high return haven, these funds are capable of generating enough wealth, which may help you retire early and pursue your passion in life.
4. How to evaluate Best Equity Mutual Funds?
a. Fund returns
, in terms of return on investment, is considered the most crucial parameter for ranking or selection of funds. Investors may look at returns over a period say five years. One may select funds that have consistently outperformed their benchmark indices (index to which a fund’s returns are compared). They should also fare reasonably well when compared with their peer set over the more extended time frames.
b. Fund history
Active management from a trusted fund house is necessary before you invest in a fund. You must have confidence in the asset management company. Ideally, the chosen fund house should also have a clean and long business history of at least say, five years. It ensures that the fund has seen the market cycles of slump and rally numerous times.
c. Expense ratio
is the annual expense incurred by funds, and it is expressed in percentage of their average net asset. Expense ratio is what the mutual funds charge investors for managing money on their behalf.
d. Financial ratios
With the significant risks involved, the risk-return ratio becomes an essential factor for consideration. To judge this, the Sharpe Ratio is a critical metric associated with the equity fund’s performance.
Sharpe Ratio is an indicator of risk-adjusted return. It represents the excess return provided by the fund for a given level of risk. In short, the higher the Sharpe ratio, the better is the risk-adjusted return for that fund.
5. Top 5 Best Equity Mutual Funds in India
While selecting a fund, you must analyse the fund from different perspectives. Various quantitative and qualitative parameters can be used to arrive at the best equity funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top five large-cap funds in India based on the past five-year returns. Investors may choose the funds based on a different investment horizon such as ten-year returns. You may include other criteria such as financial ratios as well.
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.
If you are finding it difficult to understand and analyse funds, then contact us. You can invest in hand-picked funds in a hassle-free and paperless manner.
FAQs (Frequently asked Questions)
As a tax-paying citizen, the Section-80c of the Indian Tax Act allows you
some breather –
a deduction of up to 150,000 from your total annual income.
Which are the best mutual funds to invest in India?
You may consider picking the best mutual fund depending on your investment objectives and risk tolerance. You could check the track record of the mutual fund house and the fund manager before investing in the mutual fund. However, you may invest in the mutual fund only if you are comfortable with the investment style of the fund manager.
You must check the expense ratio before putting your money in the mutual fund. You may find the best mutual funds having a lower expense ratio. However, you must check other important parameters before investing in the mutual fund. You would find the best mutual funds have a lower turnover ratio for the portfolio. You may avoid mutual funds where the fund manager churns the portfolio many times.
You may pick the best mutual funds depending on your investment horizon. You could invest in equity funds only if you have an investment horizon of three years or more. You may invest in debt funds for a shorter time horizon of under three years. Invest in balanced or hybrid funds only if you have an investment horizon of three to five years.
You may measure the performance of mutual funds against a benchmark index to select the best mutual funds. For example, you may check the performance of a large-cap fund against the Nifty 50. Compare the performance of the mutual fund against its peers and also take a look at the consistency of performance. Best mutual funds have a consistent track record of outperforming peers and the benchmark index over five years or more.
You must choose the best mutual fund house with large assets under management (AUM). The fund house may be able to bear sudden redemption pressure if it has large assets under management.
How to find the best performing mutual funds in India?
Best performing equity fund:
An equity mutual fund may be the best performer in its category if it consistently beats the benchmark index over some time. The best performing equity fund has a lower expense ratio as compared to peers. You may find the best performing mutual funds doing well across market cycles.
You must check the alpha of the equity fund to identify the best performing mutual fund. It shows the excess return generated by the equity fund above the benchmark index. You can pick the equity fund with a high alpha as compared to the peers.
You must take a look at the beta of the equity fund. It gives you an idea of the volatility of the fund as compared to the benchmark index. An equity fund with a beta less than one is less volatile as compared to a fund with a beta more than one.
Take a look at standard deviation which gives you an idea of the volatility of the equity fund. You may find an equity fund with a higher standard deviation to be riskier as compared to a fund with lower standard deviation. You may pick the best performing equity fund based on risk-adjusted returns. Check the Sharpe’s ratio of the equity fund and opt for an equity mutual fund scheme with a higher Sharpe’s ratio which signifies a higher risk-adjusted return.
Best performing debt fund:
You may consider picking the best debt funds based on the credit quality of the bonds in the portfolio. Credit rating agencies would assign a credit rating to bond-issuers based on their ability to repay the principal and interest amounts. You must invest in debt funds with AAA-rated bonds in the portfolio.
It is a safer investment as compared to bonds of a lower rating which may offer a higher interest rate. However, they could default on both principal and interest payments.
You may select the best performing debt fund based on the expense ratio. You must not pick a debt fund with a high expense ratio. Best debt funds have an excellent track record of performance over three to five years. You may select the best debt fund where the average maturity period matches your investment horizon.
Best performing hybrid fund:
You could pick the best performing hybrid fund with a good track record of performance over three to five years. Select a hybrid fund which has beaten the benchmark index and peers over some time.
You may check the track record of the fund house and the investment style of the fund manager before picking the best performing hybrid fund. Pick a fund house with huge assets under management which can bear the sudden redemption pressure of big investors.
Select the best performing hybrid fund with a low expense ratio. A high expense ratio may eat up the return from the fund. The best performing hybrid funds must match your investment objectives and risk tolerance. Take a look at the portfolio of conservative hybrid funds. It gives you an idea on the credit quality of bonds in the portfolio.
Which is the best way to buy mutual funds in India?
You may buy mutual funds through cleartax invest. Follow these steps to invest in mutual funds.
- You must log on to cleartax invest
- You then select the mutual fund house from the list of fund houses
- Select the mutual fund scheme based on your investment objectives and risk tolerance and click on Invest now
- You must select the amount you plan to invest in the mutual fund scheme and the mode as either One Time or Monthly SIP.
- You must fill up the requisite details such as name, email ID, mobile number and complete the transaction.
Complete your KYC (Know Your Customer) before investing in a mutual fund scheme. You must visit the website of a KRA (KYC Registration Agency) and create your account. You will have to fill the KYC registration form with details such as your name, email ID, mobile number and so on.
Upload copies of your self-attested identity proof such as PAN Card and address proof such as passport, driving license or Voter ID along with a passport size photograph at the KYC Registration Agency. You may complete the IPV (In-Person Verification) through a video call to verify your documents against the originals and also your signature.