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.