• Ankur Kapur, CFA, CFP

Top equity mutual funds in India

There are thousands of mutual funds and identifying 4-5 funds for your investment can be a daunting task. Some bit of financial analysis can help you identify a limited basket of funds. Regularly monitor that basket so that you are always invested in relevant funds.


Yo equity mutual funds

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 4-5 funds that meet your objective is a challenge.


Most investors look at the record for selecting equity mutual funds. A high return may be on the count of short-term investment ideas that may not be sustainable.


The first filter should exclude sector-based funds. Sector-based funds expose you to unnecessary sector risk and that may create a unique risk.


Although past performance is not the only factor it is still an important factor to consider. A fund should prove its merit for 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, 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.


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.


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.


Large-cap funds

  • UTI Nifty Index Fund

  • UTI Next Nifty Index Fund

Mid-cap fund

  • Franklin India Prima Fund

  • Kotak Emerging Fund


Small-cap fund

  • SBI Small Cap Equity Fund

  • HDFC Small Cap Equity Fund


Tax saving funds

  • Axis Long Term Equity Fund

The analysis needs to be repeated every quarter so that we do not get surprises during medium to long-term horizon. Asset allocation in these specific categories and debt depends upon specific financial needs. You have to structure the portfolio in such a way that your overall investment portfolio suits your behavioral aspect too.

Numerous websites are providing mutual fund ratings. Often those ratings are paid or biased towards short-term returns. If you follow this approach, you will not fall prey to fund houses trying to trick you with short-term performance.

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