Top equity mutual funds in India
Before we talk about top mutual funds in India, we must also understand the process of arriving at these mutual funds.
There are thousands of funds and selecting 3-4 funds that meet your objective is a challenge.
Most investors have “look at the past record” approach for selecting equity mutual funds. This may not be a complete answer.
For all practical reasons, you should avoid sector based funds and international funds. Sector based funds expose you to unnecessary sector risk and international funds are able to deliver only when INR depreciates. Both these situations create a unique risk and may be avoided.
Although past performance is not the only factor it is still an important factor to consider. A fund should prove its merit over a period of at least 5 years. Therefore, a fund that is recently launched may be avoided.
Now that ground rules are laid, here are the aspects to look at closely while short-listing the funds. You have to source all the funds in specific categories i.e. large-cap, mid-cap, small cap, multi-cap and tax saving funds. If you do not perform analysis basis specific category of equity mutual fund, there may be an overlap of securities that will be detrimental to your portfolio.
Criteria no. 1: 5-years Alpha
In simple terms, how well the fund has performed better than the benchmark. A large-cap category can have the benchmark as ‘Nifty 50’ whereas others can have ‘Nifty 500’ as the benchmark. Any funds whose 5-year performance is less than the benchmark may be excluded. Think about it, if the fund manager is not able to beat the benchmark, the manager is destroying value rather than adding value to the investor’s portfolio. Basis the recent SEBI’s requirement to align mutual fund schemes as per the fundamental attributes, various mutual fund houses are combining schemes that have the similar fundamental attributes. This will make calculating alpha redundant for some time since good and bad schemes combined together may indicate above average performance but that may not be a correct assessment. SEBI circular
Criteria no. 2: Information ratio (IR)
Information ratio is a measure of the risk-adjusted return. Information ratio shows the consistency of the fund manager in generating superior risk-adjusted performance. Higher the ratio better it is. IR is expected active return divided by tracking error, where the active return is the difference between the return of the security and the return of a selected benchmark index, and tracking error is the standard deviation of the active return. IR calculation may be misleading due to the recent changes to combine mutual fund schemes based on fundamental attributes.
Criteria no. 3: Asset Under Management (AUM)
As a rule, you should probably avoid funds with assets less than Rs 100 crores simply because of the relatively higher expenses associated with small funds.
Small funds may not survive or may undergo changes in the objectives in the search for greater acceptance in the marketplace. Whether through asset growth or other factors, over time a fund’s return tends to move towards the average.
Criteria no. 4: Fund manager tenure
A fund manager manages a fund. He takes a call on what to buy and what to sell and also in what proportion. Fund’s performance is directly linked to the skill of the fund manager. Therefore, the tenure of a fund manager is an important factor to consider when selecting an equity mutual fund. When managers change, a wait-and-see policy is usually appropriate.
Apply these criteria’s to filter out relevant mutual funds. You will find only a limited set of mutual funds in each of the five equity mutual fund categories.
Here is a list of funds in each category after considering the recent combination of mutual fund schemes.
- Aditya Birla Sun Life Frontline Equity Fund
- SBI Bluechip Fund
Large-cap funds and mid-cap fund
- Franklin Templeton India Prima Fund
- Mirae Asset Emerging Bluechip
Mid-cap and small-cap fund
- Franklin Templeton India Smaller Companies
- DSP Black Rock Small and Mid Cap
- Mirae Asset India Equity Fund
- Aditya Birla Sunlife Equity Fund
Tax saving funds
- DSP Black Rock Tax Saver
- Axis Long Term Equity
The list of the top mutual fund is not an end but rather only a starting point. Often people get too aggressive when the markets are moving up but having a mix of assets ensures a reasonable return in all seasons. A long-term first-time investor may also evaluate Index Funds with the lowest expense ratio.
You have to structure the portfolio in such a way that your overall investment portfolio suits your behavioural aspect. You don’t want to have a heartache due to portfolio fluctuations 🙂