Personal Finance

New investor? Here are 3 mutual fund categories for you to invest in

Dhuraivel Gunasekaran BL Research Bureau | Updated on August 19, 2020 Published on August 19, 2020

Large-cap, index funds and aggressive hybrid are relatively safer categories among equity funds

If you are a new investor seeking to make a foray into equity investing, it may be better to start the journey with equity mutual funds and not jump straight away into direct equity investing and trading. Many investors who start investing in high-risk investment avenues such as direct equities often get carried away by the rush and make mistakes which put their investments and sometimes, the journey itself, at risk. With direct equity stocks, you have to do extensive research before investing and track the investment closely, while in mutual funds, there are experts who make the investing decisions and do the tracking. These professionals understand the stock and market dynamics more closely and manage your money with measured risk. Your first brush with mutual funds carries less risk of leaving you with a bad experience than the first brush with direct equity investing.

Among the wide variety of equity-oriented funds available in the market, you can look at three categories — large-cap equity funds, equity index funds and aggressive hybrid funds — that can help you to participate in the equity market with relatively moderate risk compared with many other equity fund categories.

You can consider investing in these funds through the systematic investment plan (SIP) route that are better equipped to absorb market shocks. SIPs also help inculcate the habit of saving and building wealth for the future. The ideal investment horizon should be long-term — at least 5 years or more.

Large-cap funds

As required by the market regulator Securities and Exchange Board of India (SEBI), large-cap funds invest at least 80 per cent in companies ranked 1st-100th in terms of full market capitalisation. These funds invest in stocks that are primarily included in the Nifty 50, Nifty 100 or BSE 100 indices. These are often stocks of blue-chip companies — large well-established organisations, often in sound financial shape with relatively good earnings potential. They generally have lower volatility and are less vulnerable to adverse changes in the macroeconomic environment compared to smaller companies.

The large-cap category can weather market downturns better during bear and corrective phases compared to other equity-oriented categories such as mid-cap and multi-cap categories. On the other hand, large-cap funds tend to underperform the smaller counterparts during equity market rallies. However, they often generate better risk adjusted returns over the long run.

Axis Bluechip, Mirae Asset Large Cap and Canara Robeco Bluechip Equity are some of the top-performing schemes in the large-cap category. These funds are rated five-star by BusinessLine Portfolio Star Track MF Ratings.

 

 

Index funds

Index funds are passively managed mutual funds seeking to replicate the performance of the underlying benchmark without active management by fund managers. They imitate the portfolio of an index (say, Nifty 50) by investing in stocks that are part of the index in the same proportion as in the index. On the other hand, actively managed funds aim to outperform their benchmarks with the help of fund managers. With no active management, index funds have much lower charges (expense ratios) than actively managed funds.

Index funds are a good option for investors seeking index-linked returns. There are currently 35 index funds in the market tracking various indices. From among these, you can consider index funds tracking the Nifty 50, Nifty Next 50 and Nifty 500 indices. The Nifty 50 is one of the most traded indices in the world and the top-traded derivative index in India. The Nifty Next 50 enables you to invest in stocks that have the potential to become part of the Nifty 50 Index in the future. The Nifty 500 index covers more than 95 per cent of the listed universe on the NSE in terms of full-market capitalisation.

Index funds that have lower expense ratio and less tracking error (deviation in returns from the benchmark) are preferred. UTI Nifty Index Fund, ICICI Prudential Nifty Next 50 Index Fund and Motilal Oswal Nifty 500 index funds are good choices.

Aggressive hybrid funds

As mandated by SEBI, aggressive hybrid funds allocate 65-80 per cent of their corpus to equity investments, while the rest is invested in debt instruments. The higher allocation to equity can help deliver good returns in the long run. Debt exposure helps cap losses in market downturns. These funds are treated like equity funds for taxation purposes.

The schemes under the aggressive hybrid fund category depreciate less during market corrections and appreciate less during rallies compared with other equity-oriented categories. Lower volatility can result in superior risk-adjusted returns compared with many other equity-oriented categories over the long term.

SBI Equity Hybrid, Canara Robeco Equity Hybrid and ICICI Pru Equity & Debt are some of the better performing funds under the aggressive hybrid category.

While the equity portion of these funds is often managed with multi-cap approach, the debt portion is deployed in fixed income instruments with varying maturities, depending on the interest-rate movement in the economy.

Safer start

It’s safer to start equity investing with mutual funds that are managed by investment professionals than with direct equity investing that involves investing and tracking on one’s own. There is a higher risk of burning your fingers in the latter.

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Published on August 19, 2020
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