What are Equity Mutual Funds?

The Mutual Funds that invest 65% or more of the Portfolio Corpus in Equities is termed as Equity-Oriented Fund, according to SEBI. So Equity Funds invest primarily in Equity Shares of Companies, whether Large-Scale industries, Mid-Scale businesses or Small-Scale entities. The AMC & the Fund Manager maybe managing them Actively or Passively. With Best Equity Mutual Funds, your investments have the potential to receive High Returns, over the mid to long term.

Equity Mutual Funds Schemes can be categorized according to Company Size, the Holdings in the Portfolio, Business Sector, etc. All Mutual Funds Investments have an element of Risk attached. With Equity Mutual Funds, this is more so. The reason being that a significant part of the Corpus is invested in Equity. Which is subject to frequent fluctuations as per the prevalent market conditions.

Still, investing in the best equity Mutual Funds get you the best possible Returns. Making them the most preferred choice of investors who are willing to give their investment time and tide over the Risk factor attached.

Who should invest in Equity Funds?

The whole idea of investing is to create enough wealth to have financial security at a later stage in life. And while someone may use market volatility as an excuse against investing in Mutual Funds, just taking a look at the Returns on Investments inspires them enough to take the plunge.

When your career has started, you are earning more and understanding to balance income against expenses. Now you would be adjusting your vision to focus your savings towards investing to achieve your long-term objectives.

Points to be considered while choosing Best Equity Mutual Funds

We still suggest that you keep a few parameters in mind, before investing in the best equity mutual funds of your choice.

  1. Have Clear Goals, Risk Tolerance & Duration: You will have over 10,000 Mutual Funds to choose from, so it helps if you have clear Financial Objectives to narrow down the list. Decide whether you would be able to tolerate a portfolio with extreme ups and downs? Finally, think about how long you can stay invested. Are you looking for current Regular Monthly Income or long-term appreciation (capital gains)?
  2. Type of Equity: Corpus of the Fund is to be invested into which class of company size. They may be Large-Cap, Mid-Cap, Small-Cap or Multi-Cap. Small-Cap and Mid-Cap funds have a Higher Risk & Higher Return potential than Large-Cap funds. And the Multi-Cap Funds maintain a well-diversified portfolio.
  3. Expense Ratio: The Fund Houses and AMCs earn through your Mutual Fund’s investment.  You should choose to invest in Funds with the lowest possible expense ratio. The maximum upper limit mandated by the SEBI is 1.05%. Actively-managed Equity Funds have a higher expense ratio than the passively managed ones.
  4. Turnover Ratio: If a high percentage of the portfolio is being bought and sold each year, it would invite more money being paid in taxes. Be wary of the funds that habitually turnover 50% or more of their portfolio.
  5. Consider the experience of the Fund Manager: If the Fund Manager is experienced and disciplined, it would ensure a smooth investment.
  6. Check for Exit Load: Exit load is charged when you redeem your Mutual Fund units. Try to look for Mutual Funds with None or least Exit Load being charged.
  7. Don’t put all eggs in one basket: Put your money in different Funds and keep your investment well-diversified.
  8. Start Early: Stop analyzing forever and take the quantum leap. You have the option to start small, with SIP. Enjoy the learning process, you have the time on your side.
  9. Fund Objectives: All Mutual Funds is incorporated with a different goal. It is important for you to know whether the Fund’s objectives are aligned with your own goals. The Fund Managers pick stock-picking according to the investing style required for that particular Fund. Investing can be value investing or growth investing. Value investing involves picking undervalued stocks whose price is expected to rise eventually leading to a profit.

Evaluating Mutual Funds

  1. Returns on Investment (ROI): You should look for the ROI to check the past performance of the Fund. Ideally, you must look for at least a duration of 5-10 years. This long duration would mean the Fund must have faced all kinds of market fluctuation.
  2. Risk-Adjusted Returns: These are the calculative Returns your Fund makes when compared to the Risk indicated over a period of time. Comparing a few of the Mutual Funds with the same percentage of Returns over the same period of time, the lesser Risk funds have a higher Risk-Adjusted Returns.
  3. Benchmark Performance: With Benchmark, you can measure the quality of the funds against the standard measurements. It is a point of reference to the funds of the peer markets. The Benchmark helps you evaluate the performance of your investment against the market competition. You may select the Fund that has beaten its Benchmark Index.
  4. Background: Look for the history of the Mutual Fund House, AMC, Mutual Fund Distributor thoroughly. The Fund from a Trusted Fund House/AMC with a long-standing and clean business record in the market would be ideal. Moreover, you must have trust in the Fund Manager. The person responsible to make investment decisions and stock selection for the Fund’s portfolio.
  5. Financial Ratios: There are five main indicators to measure investment Risks. These are Sharpe Ratio, Alpha, Beta, R-squared, and the Standard Deviation. These statistical measures are historical predictors of investment Risk, volatility and returns, used to analyze stocks, bonds, and mutual fund portfolios.

 Financial Ratios/Indicators of Risk/Returns Explained

  1. Sharpe Ratio:  It is calculated by subtracting the Risk-free Rate of Return (such as Government Bonds) with the Rate of Return on the Fund’s investment and dividing the result by the investment’s standard deviation of its Return. The Sharpe ratio tells us whether the ROI is due to wise investment decisions or the result of taking excess Risk. This ratio is useful because while one portfolio may generate higher Returns than its peers, still, it can be only termed as a good investment if those higher Returns do not come with too much Risk Added. The greater the Sharpe ratio of an investment, the better its Risk-adjusted performance.
  2. Alpha Ratio: It is a measure of the Fund’s performance on a Risk-adjusted basis. It takes the volatility (price risk) of the Fund’s Portfolio and compares its Risk-adjusted performance to its benchmark index. In the case of India, the benchmarks are either NIFTY or BSE Sensex. The excess ROI, as compared to the Return of the benchmark index, is its Alpha. In other words, Alpha represents the value that the fund manager adds or subtracts from a fund portfolio’s return. An Alpha Ratio of 1.0 means the Fund has outperformed its benchmark index by 1%.
  3. Beta Ratio: Beta Ratio measures volatility, or the systematic Risk, of the portfolio compared to the market as a whole. Beta is calculated using regression analysis. It represents the tendency of ROI to respond to the fluctuations in the market. A Beta of 1.0 indicates that the movement of the Fund’s price will be similar to that of the market. Any Beta Ratio of lesser than 1.0 indicates that the Fund will be less volatile than the market, and so on. Investors with low-risk potential should focus on Funds with low Beta Ratio and vice versa.
  4. R-Squared: R-Squared Ratio represents the percentage of a Fund portfolio’s movements when compared to the movements in a benchmark index. R-Squared values range from 0 to 100. A Mutual Fund with an R-squared value of 70 or less, typically does not perform like the index. Those between 85 and 100 indicate a performance record as closely correlated to the Benchmark Index.
  5. Standard Deviation: The Standard Deviation is applied to the annual rate of return of an investment to measure its volatility and Risk. A more volatile stock would have a higher Standard Deviation. In Mutual Funds, the Standard Deviation tells us how much the ROI is deviating from the expected returns based on its historical performance.

Some Top Equity Plans in India

At the time of selecting a Fund, you must analyze that Fund with various parameters. There are different quantitative and qualitative conditions that can be used to arrive at the best equity mutual funds as per your requirements. Keeping in mind the financial goals, risk appetite, and investment horizon.

We have presented the top 5 options of Large-Cap Funds in India in the below table. The parameter for selecting these is their Returns for the past 3 & 5-years. You may choose longer criteria of, say 10-year Returns for your investment, to take maximum benefits from your Mutual Funds. Ideally, you should include all the conditions listed above.

*The information is based on May 14, 2019. The Returns are subject to change. Also, this selection is based on a general criteria. You must choose Funds according to your own parameters.*

If it the task of compiling a few schemes together to create a well-diversified Mutual Funds Portfolio seems like a difficult task, worry not. Help is at hand with WealthBucket.

With our assistance, you would be able to have a well-balanced portfolio containing Large-Cap Mutual Funds, Multi-Cap Mutual Funds, and Small-Cap Mutual Funds.

Call us now at +91 8750005655 with your financial requirements. You can also email us in case of any queries at contact@wealthbucket.in

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