In India, Diwali marks the beginning of a new year for Hindu communities. It is a time for celebration and jubilation with the Diwali bonus and cash gifts being the cherry on the cake. Recall the sheer joy you experience when you get a little notification on your phone saying ‘Diwali Bonus Received’.
Even though Diwali is celebrated towards the end of the year, the blueprint on how to spend that Diwali bonus and cash gifts is usually underway from January. The house needs a fresh coat of paint, the children want new gadgets, your wife perhaps wants to buy gold, etc.
Receiving the Diwali bonus and cash gifts is arguably one of the most anticipated moments of the year for a majority of Indian households. Sadly, we do not think of investing the Diwali bonus for our brighter future.
Honestly, have you considered using the Diwali bonus to top-up your retirement fund? Ever wondered, instead of a fresh coat of paint, you could use the Diwali bonus to prepay your home loan? And how about using cash gifts to pay some of your insurance premiums instead of hosting a house party?
[Read More: Should You Use Your Diwali Bonus to Repay Your Debt or Invest It Instead?]
Investing your Diwali bonus in the best equity mutual funds instead of splurging it can create wealth. Unfortunately, instant gratification stops us from using our Diwali bonus and cash gifts to create long-term wealth. So, put instant gratification aside for a moment, and reconsider: Wouldn’t it be wonderful if your Diwali bonus could create long-term wealth for you and your loved ones?’ Wouldn’t investing the Diwali bonus in best equity mutual funds be the perfect way to start the new year?
It is time we change the narrative. If the pandemic has taught us anything, it is that we can survive without a fresh coat of paint or new clothes or an expensive gadget, but we cannot live well if we are not financially secure and stable. This is why, ideally, the best utilisation of your Diwali bonus and cash gifts is investing it in the best equity mutual funds.
[Read More: Earned Diwali Bonus and Cash Gifts? Invest in Mutual Funds to Brighten Your Financial Future]
Using the Diwali Bonus to Create a Shiny and Wealthier Financial Future
Some of you might have apprehensions about, say, what will saving Rs 50,000 a year do? It’s too little, like a drop in the ocean. But you’d be surprised to know that this little drop can cause ripple effects that can alter your financial future for the better.
Graph 1: A thoughtful investment now can brighten your financial future
*Assumed rate of return – 12%
The above chart is for illustration purposes only
(Source: PersonalFN Research)
As per the above graph, if you invest your Diwali bonus of Rs 50,000 every year, then your corpus at the end of 20 years would be a whopping Rs 40.34 Lakhs, assuming a conservative return of 12%.
Now most of us start working in our early twenties and retire in our late fifties. So, we have a long-term time horizon to park the Diwali bonus, which gives us the leeway to invest in slightly riskier investment options like equity mutual funds instead of investing in low-risk lower-returns generating investments like Bank Recurring Deposit, Public Provident Fund, etc.
Graph 2: Invest in wealth-creating investment avenues
Data as of 11th November 2021. Returns are 10-year average returns.
The above chart is for illustration purposes only.
(Source: PersonalFN Research)
In the past 10 years large-cap equity mutual funds have generated a return of 14.48% as of 11th November 2021 as against the 7.75% and 7.27% returns generated by PPF and bank fixed deposits respectively. If you had invested your Diwali bonus of Rs 50,000 in large-cap funds, you would have created a corpus of Rs 2.24 crore in 30 years against a paltry Rs 53.19 lakh in bank fixed deposits. But then again, if you had invested your Diwali bonus of Rs 50,000 every year in small-cap funds, for 30 years, then your corpus would be worth a mammoth Rs 7.69 crore considering a 10-year average of 20.39% as of 11th November 2021.
So, while it is evident that equity mutual funds are the best option to park your Diwali bonus, the bigger questions still lie unanswered-
- Which is the best equity mutual fund to park your Diwali bonus and cash gifts for a brighter future?
- Which mutual fund category should you choose?
- Should you play the field as a conservative investor and choose large-cap funds?
- Or maybe give your future the ammunition it needs in the form of small-cap funds?
The answer is neither.
When markets are as high as they are today, it does not make sense to invest in only one mutual fund category. Even a minor correction at this level — which is quite possible — can weigh heavily on your mid and small-cap portfolio. Living proof of this was during the 2008 market crash.
[Read More: Sensex is Near its Lifetime High! Best Equity Mutual Funds to Invest in Now]
In 2007, the BSE Mid-cap index soared 68% and the BSE Small-cap index registered a 93% upside, while BSE Sensex gained 47%. But this was a short-lived event as in 2008, the BSE Mid-cap index and the BSE Small-cap index fell by -33% and -40% respectively, and the BSE Sensex suffered a -24% fall. So, whenever markets undergo a correction, mid-cap and small-cap mutual funds are generally the first ones to get affected most.
Then, what is the strategy you should follow?
The best strategy to follow while investing your Diwali bonus when markets are at a lifetime high is the Core and Satellite investment strategy.
The Core and Satellite investment strategy is time-tested and followed by some of the most successful equity investors. It involves building two interconnected investment portfolios with a core and satellite approach to portfolio construction.
The Core portion consists of comparatively safer mutual fund categories such as Large-cap Funds, Flexi-cap Funds, and Value/Contra Funds with the basic premise that these types of equity mutual fund schemes in the core of the portfolio would be less exposed and vulnerable to market downturns.
On the other hand, the satellite portion of the portfolio primarily consists of aggressive mutual fund categories which will lead the charge and give you the desired boost when the market scales new highs and push the returns of the mutual fund portfolio. At times, the satellite portion may also include relatively safer funds like ‘aggressive hybrid funds’ in conditions when the markets are at its peak or trending in an overvalued zone. It will help stabilise the portfolio in case of higher volatility.
At PersonalFN, the internal arrangement of the core and satellite portfolio we follow is –
- Core Portion – 60%
- Satellite Portion – 40%
Before we share the list of the best equity mutual funds to park your Diwali bonus and cash gifts, let us quickly take a look at the performance of our selected mutual fund categories.
Graph 3: How certain sub-categories of equity mutual fund schemes have performed
Data as of 11th November 2021
(Source: ACE MF, PersonalFN Research)
The average 10-year returns of these five best equity mutual fund categories is a whopping 15.98% as of 11th November 2021, which is decent when you consider that 60% of the portfolio is in safer Large-cap Funds, Value/Contra funds, and Flexi-cap Funds.
Let us finally take a look at the best equity mutual funds to park your Diwali bonus for a brighter future.
Table 1: The Best Equity Mutual Funds to build Core & Satellite Portfolio
| Core Portfolio | Best Equity Mutual Funds | 1-Year | 3-Years | 5-Years |
| Large-cap Funds | Mirae Asset Large-cap Fund | 46.11% | 21.54% | 18.24% |
| Flexi-cap Funds | Parag Parikh Flexi-cap Fund | 61.75% | 32.33% | 23.75% |
| Large & Mid-cap Funds | Canara Robeco Emerging Equities Fund | 57.67% | 26.30% | 20.64% |
| Value/Contra Funds | Invesco India Contra Fund | 51.60% | 23.14% | 20.94% |
| Satellite Portfolio | Best Equity Mutual Funds | 1-Year | 3-Years | 5-Years |
| Aggressive Hybrid Funds | SBI Equity Hybrid Fund | 39.30% | 19.36% | 15.09% |
| Mid-cap Funds | Axis Midcap Fund | 64.02% | 30.79% | 25.08% |
Returns are of Direct plans – Growth option.
Data as of 11th November 2021.
(Source: ACE MF, PersonalFN Research)
This table is for illustration purpose only. Please consider your investment objective, suitability and risk profile before investing in any fund mentioned above.
Now comes the most important part, which is deciding the allocation you need to invest your Diwali bonus in the above-mentioned list of the best equity mutual funds.
Best Equity Mutual Funds to Invest your Diwali Bonus – Large-cap Category
As per SEBI categorisation, Large-cap Funds invest a minimum of 80% of their corpus in equity (stocks) and equity-related instruments of large-cap companies, defined as the top 100 companies in terms of market capitalisation. The advantage of investing in large-cap companies is that they are well-established, with reliable brand equity, competitive advantage, strong balance sheet, and economic moat.
Due to their huge cash reserves and high product demand, large-cap companies are able to manage economic downturns much better than mid and small-cap companies. In terms of portfolio allocation, we would suggest allocating 25% to large-cap mutual funds. Advisably, one of the best large-cap mutual funds to invest your Diwali bonus is Mirae Asset Large-cap Fund.
Reasons why Mirae Asset Large-cap Fund is one of the Best Equity Mutual Fund to invest your Diwali bonus into:
- The fund has a high AUM of Rs 30,804 crores as of October 2021, which will help it keep redemption pressure, if any, at bay.
- The fund has one of the lowest expense ratios in the large-cap category at 0.53% as of 31st October 2021.
- The fund has managed to generate an Alpha of 1.18% over its benchmark, Nifty 100-TRI, as of 11th November 2021, outperformed the category average, and ranks on returns in the large-cap category.
[Read More: Best Large Cap Mutual Funds to Invest in 2021]
Best Equity Mutual Funds to Invest your Diwali Bonus – Flexi-cap Category
Flexi-cap mutual funds have to invest a minimum of 65% of their assets in equity and equity-related instruments with dynamic asset allocation across large-cap, mid-cap, and small-cap stocks. Due to the flexible investment mandate to invest in equities across market capitalisations, flexi-cap funds are less risky than pure mid and small-cap funds. Nevertheless, flexi-cap funds tend to outperform pure large-cap funds. Investors can allocate around 20% of their investible corpus to Flexi-cap Funds.
One of the best Flexi-cap Funds to invest your Diwali bonus is Parag Parikh Flexi-cap Fund. The fund was launched in 2013 but has managed to amass an AUM of Rs 17,219 crores as of 31st October 2021.
Reasons why Parag Parikh Flexi-cap Fund is the one of Best Equity Mutual Fund to invest your Diwali bonus are as follows:
- The fund has generated a 5-year return of 23.83% as of 11th November 2021, one of the best in the Flexi-cap category.
- The fund has a decent expense ratio of 0.83% as of 31st October 2021.
- The fund gives investors an opportunity to invest in overseas stocks like Alphabet Inc., Amazon.com Inc., etc.
- The fund has managed to generate an Alpha returns compared to its benchmark, Nifty 500-TRI, as of 11th November 2021, outperformed the category average by a remarkable margin, and is one of the top rankers in the Flexi-cap Fund category.
[Read More: Best Multi-Cap/Flexi Cap Funds to Invest in 2021]
Best Equity Mutual Funds to Invest your Diwali Bonus – Large & Mid-cap Fund Category
SEBI has defined large-cap and mid-cap mutual funds as equity-oriented mutual funds that are mandated to invest a minimum of 35% of their corpus in equity and equity-related instruments of large-cap and mid-cap companies, listed as the top 250 companies in terms of market capitalisation. Large-cap and mid-cap mutual funds offer investors the best of both worlds, i.e. stability from large-cap stocks and high growth from mid-cap stocks. In terms of ideal allocation, investors can allocate up to 20% of their investible Diwali bonus to large and midcap mutual funds.
One of the best Large & Mid-cap Funds to invest your Diwali bonus is Canara Robeco Emerging Equities Fund. Let us look at the reasons why this is the best large and mid-cap mutual fund to invest your Diwali bonus.
Reasons why Canara Robeco Emerging Equities Fund is one of the Best Equity Mutual Fund to invest your Diwali bonus are as follows:
- The Fund has an impressive AUM of Rs 11,773 crores as of 31st October 2021, the second-best in the large and mid-cap category.
- The fund has the lowest expense ratio in the large-cap and mid-cap category at 0.63% as of 31st October 2021.
- The fund has generated a 5-year return of 21.37% as of 11th November 2021, the second-best in the large and mid-cap fund category.
[Read More: Best Large and Mid Cap Mutual Fund to Invest in 2021]
Best Equity Mutual Funds to Invest your Diwali Bonus – Value/Contra Fund Category
Value investing is a time-tested strategy that involves identifying/finding stocks that are trading below their intrinsic value. It is through value investing that Warren Buffett’s net worth stands at a colossal 105 Billion US Dollars as of 12th November 2021.
A value fund is mandated to invest a minimum of 65% of its assets in value stocks across market capitalisation. While value funds tend to underperform during momentum-based market rallies led by growth stocks, time and again it has been proven that value stocks are the best bet during market downturns. But remember, patience and a long-term investment horizon are necessary when investing in value funds and hence you could allocate up to 10% of your investment amount to value funds.
One of the best Value/Contra Fund to invest your Diwali bonus is Invesco India Contra Fund. Let us check out the reasons why Invesco India Contra Fund tops our list of best value/contra funds in India.
Reasons why Invesco India Contra Fund is one of the Best Equity Mutual Fund to invest your Diwali bonus are as follows:
- The fund has managed to garner a decent AUM of Rs 8,457 crore as of 31st October 2021.
- The fund has generated a 5-year return of 20.94% as of 11th November 2021.
- The fund is well diversified with 57.97% in giant-cap, 15.05% in large-cap, 17.75% in mid-cap and 9.23% in small-cap companies which gives investors taste of the entire market in one fund.
[Read More: Best Value Fund to Invest in 2021]
Best Equity Mutual Funds to Invest your Diwali Bonus – Aggressive Hybrid Fund Category
Hybrid mutual funds give you a ready-made solution for portfolio diversification as you get to diversify across two major asset classes, equity and debt whilst investing in a single fund. As per SEBI, aggressive hybrid mutual funds invest between 65%-80% of their corpus in equities and the balance 20%-35% in debt instruments. Investors can invest up to 15% of their Diwali bonus and cash gifts in aggressive hybrid funds.
One of the best Aggressive Hybrid funds to park your Diwali bonus into is SBI Equity Hybrid Fund. Let us look at the reasons that make SBI Equity Hybrid Fund is one of the best equity funds worthy of your Diwali bonus.
Reasons why SBI Equity Hybrid Fund is one of the Best Equity Mutual Fund to invest your Diwali bonus are as follows:
- SBI Equity Hybrid Fund is the biggest aggressive hybrid fund in India with an AUM of Rs 48,043 crores as of 31st October 2021.
- The fund has the lowest expense ratio of 0.90% as of 31st October 2021 in the aggressive hybrid fund category.
- The fund has managed to generate an Alpha of 2.63% over its benchmark, CRISIL Hybrid 35+65 Aggressive Index as of 11th November 2021, outperformed the category average returns and is amongst the top rankers in this category.
[Read More: Best Aggressive Hybrid Mutual Funds to Invest in 2021]
Best Equity Mutual Funds to Invest your Diwali Bonus – Mid-cap Fund Category
Compared to the other categories, this is by far the riskiest one on our list of best equity mutual funds to invest your Diwali bonus into. Mid-cap mutual funds have the mandate to invest a minimum of 65% of their assets in equity and equity-related instruments of mid-cap companies, ranked from 101st to 250th in terms of market capitalisation.
Since these stocks belong to relatively newer companies, they are less resilient during market downturns but do generate superior returns in a bull market phase as the stocks of the underlying companies are yet to enter their growth spurt. This is why we would recommend maintaining your overall exposure to mid-cap mutual funds at 10%. One of the best mid-cap funds to invest your Diwali bonus into is Axis Midcap Fund.
Reasons why Axis Midcap Fund is one the Best Equity Mutual Fund to invest your Diwali bonus
- Axis Midcap Fund has the highest AUM of Rs 15,987 crore as of 31st October 2021. This keeps the redemption pressure away.
- The fund has generated an Alpha of 7.94% of 31st October 2021 over the benchmark index S&P BSE Midcap-TRI.
[Must Read: Complete List of Best Midcap Mutual Funds in 2021]
If you sensibly follow the ‘Core & Satellite Investment Strategy, here are six key benefits it adduces:
- Facilitates optimal diversification among equity mutual fund schemes
- Reduces the need to frequently churn your entire portfolio
- Reduces the risk to your portfolio
- Enables you to benefit from a variety of investment styles and strategies
- Creates wealth cushioning the downside
- Helps you potentially outperform the market
Considering the present market conditions, take the Systematic Investment Plan (SIP) route while you build the portfolio of the best equity-oriented mutual fund schemes following the ‘Core and Satellite’ approach.
Now while we have revealed the list of best equity mutual funds to park your Diwali bonus into and also given you the recommended allocation, you are far from done. It is important to monitor and review this portfolio on a regular basis to ensure that your hard-earned money is always invested in the best equity mutual fund.
How do you do this? Simply subscribe to PersonalFN’s premium research service, FundSelect.
Disclaimer: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This article first appeared on PersonalFN here
