1. What are Best Equity Mutual Funds?
Usually equity funds invest more than 75% of their portfolio in equities or stocks. Such funds could be actively managed or passively managed (Index funds). Best equity mutual funds are known to give high returns over a medium to long term investment horizon. However, since they are heavily invested in stocks, they are also relatively risky being subject to frequent market fluctuations. This makes best equity mutual funds one of the most sought after high returning funds for investors with risky appetite. However, since investing in equity funds involves a considerable amount of risk, a number of aspects and metrics need to be looked at before choosing the right set of equity funds.
2. Who should invest in Equity Funds?
You need to consider your risk appetite and investment horizon
while investing in equity funds. Usually, equity funds are meant for an investor who has an investment horizon of at least 5 years or more. However, a short-term equity investor may not be in such an opportune position because of stock market fluctuations.
If saving taxes is on your mind, then ELSS
is regarded as the best equity mutual funds
under Section 80C of the Income Tax Act. ELSS has the shortest lock-in period of 3 years. Moreover it gives higher returns than other investments eligible under Section 80C.
A budding investor may choose to go for large-cap equity funds
as these funds invest in equity shares of well-established which are known to give 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 to achieve wealth accumulation by means of robust investment strategy. 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
funds. Then there are multi-cap funds which invest across different capitalisations to maintain an optimally diversified portfolio.
Equity funds face the biggest risk which is known as market risk
. The equity funds are affected by the movements of underlying benchmark like Nifty or Sensex. An overall rise or fall in the value of the index leads to a fluctuation in the fund 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 money. Till now SEBI had mandated the upper limit of expense ratio to be 2.50%. Actively-managed equity funds have a higher expense ratio as compared to index funds.
e. Investment Horizon
Equity funds are basically suitable for individuals who have a long-term investment horizon. Usually, the fund experiences a lot of fluctuations during the short-run which averages out in the long-run of say more than 7 years in order to give returns in the range of 10%-12%. Those who choose best equity mutual funds
need to be prepared to stick around at least for the said period to enable the fund to realize its full potential.
f. Financial Goals
Best equity mutual funds
can be ideal for achieving long-term financial goals like wealth creation or retirement planning
. Being a high risk-high return haven, these funds are capable of generating enough wealth which may help you to retire early and pursue your passion in life.
4. How to evaluate Equity funds?
a. Fund returns
in terms of the returns on investment is considered the most important parameter for ranking or selection of funds. Investors may look for returns for a period of at least 5-10 years. One may, in fact, select funds which have consistently beaten 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 longer time frames.
b. Fund history
A strong parentage from a trusted fund house is necessary before you invest in a fund. You must have trust in the asset management company. Ideally it should also have a clean and long business history of at least say 5 years. It ensures that the fund has seen all the market cycle of slumps and rally.
c. Expense ratio
is the annual expense incurred by funds expressed in percentage of their average net asset. This is what the mutual funds charge investors for investing on their behalf. Direct Mutual funds tend to have lower expense ratio as compared to Regular Mutual funds. You can save a lot on distributor commissions.
d. Financial ratios
With significant risks involved, the risk return ratio becomes an important factor for consideration. In order to judge this, Sharpe Ratio
is an important metric associated with equity fund’s performance. Sharpe Ratio is an indicator of risk-adjusted return. It represents the excess return given by the fund over return given by a risk-free instrument. Simply put, the higher the Sharpe ratio, the better is the risk adjusted return for that fund.
5. Top 10 Best Equity Mutual Funds in India
While selecting a fund, you need to analyse the fund from different angles. There are various quantitative and qualitative parameters which 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 10 large-cap funds in India based on the past 5 year returns. Investors may choose the funds based on a different investment horizon like 10 years returns. You may include other criteria like 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.
Many a time investing in equity funds becomes complex. In case you don’t possess enough financial knowledge and are finding difficult it too difficult to understand, then just go for ClearTax Save
. You can invest in hand-picked funds in a hassle free and paperless manner.