In the stock markets, 6 months is too short a time horizon to measure the performance of any equity mutual fund scheme. Thus, mutual fund investors shouldn’t expect their investments to do wonders for them in 6 months. But given the fast pace of events nowadays, a lot has happened over the last 6 months.
At the beginning of 2022, who would have thought Russia would invade Ukraine in March; inflation would give policymakers sleepless nights, there would be an outbreak of the new monkeypox virus (the World Health Organisation declaring it to be a Public Health Emergency) and the faith of investors in risk assets would quiver with liquidity drying up quickly.
Between March and June 2022, S&P 500 dropped into bear territory (with a fall of more than 20%). But from the June 2022 lows and now, the S&P 500 has gained a little over +17%. This is despite the fact that U.S. Federal Reserve (Fed) hiked interest rates by 225 basis points (bps).
Currently, the market has surged reading the recent statement of the Federal Open Market Committee (FOMC), which says that while the ongoing rate hikes would be appropriate because of elevated inflation, it would be watchful of the income data for the economic outlook and that the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge. This means there may be slower rate hikes, which the equity market is well factoring in.
Thus, after having fallen -17% by June 2022 from its January highs (following the global cues), the Nifty 500 TRI (Total Return Index) also gained +19%.
Graph 1: Nifty 500—Total Return Index: Regaining the Lost Ground…
Data as of August 17, 2022
(Source: NSE, PersonalFN Research)
With such dramatic twists and turns in the markets, investors have been on a rollercoaster ride. Some who stayed invested through this phase or put in fresh capital, have mostly been rewarded for the risk being exposed to.
You see, while 6 months may not produce great results for mutual fund investors, the lesson here is that sometimes short-term volatility can offer them great long-term investment opportunities.
Therefore, pay heed to Benjamin Graham‘s valuable quote, “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
Until recently the market was a voting machine due to the Russia-Ukraine war, rising inflation, skyrocketing energy prices, high interest rates, a potential recession in the U.S. and its spillover to the other parts of the world. But eventually, time proves that the risk-reward is usually in favour of staying invested. Hence, what matters is ‘time in the market’ rather than timing the market.
Thus, instead of searching just for the best mutual funds for now, devise a sensible strategy and focus on building a long-term mutual fund portfolio. Don’t worry about the short-term volatility; take the SIP (Systematic Investment Plan) route to mitigate the risk involved and invest for the long-term rather than speculating on the market direction.
Which are the best equity mutual funds to invest in at present?
You may choose a mix of equity mutual fund schemes across the categories such as large-cap, flexi-cap, value-oriented, focused funds, and even mid and small-cap, depending on your risk appetite and the time horizon.
That said, here are the important parameters you should consider while selecting equity mutual fund schemes for your portfolio:
Don’t just pick mutual fund schemes based on past returns. Keep in mind past performance is in no way indicative of future returns. To understand how a mutual fund scheme would fare in the future you need to look at its track record across market cycles (bulls and bears), the portfolio characteristics, and many more quantitative and qualitative aspects.
At present, while the markets are near the all-time high — giving rather confusing signals and the upward interest rate cycle far from over — it would be worthwhile adopting a sensible time-tested Core & Satellite investment strategy. This would potentially prove to be a wealth multiplier over the long term and is a strategy followed by many successful long-term equity investors across the world.
The best part is that this strategy helps investors make the most of opportunities available in the market, both short-term and long-term, without taking unwarranted risks.
The term ‘Core’ applies to stable, long-term holdings of the portfolio, whereas the term ‘Satellite’ applies to the strategic portion that attempts to maximize your overall returns of the portfolio across market conditions.
The ‘Satellite’ portion, on the other hand, should comprise up to 30%-35% of the equity portfolio and include worthy Mid-cap Funds and an Aggressive Hybrid Fund. If your risk appetite is very high, maybe you could add a small-cap fund in the satellite portion.
To build a ‘Core & Satellite’ portfolio of worthy equity mutual funds, here are a few fundamental rules to follow:
- Consider equity mutual funds that have a strong track record of at least 5 years and have been amongst the top performers in their respective categories.
- The schemes should be diversified across investment styles and fund management.
- Ensure that each equity mutual fund selected scheme abides with its stated objectives, indicated asset allocation, and investment style.
- You should not only invest across investment styles (such as growth and value) but also across fund houses.
- The equity mutual fund schemes should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place.
- Not more than two equity mutual fund schemes managed by the same fund manager should be included in the portfolio.
- Not more than two equity mutual fund schemes from the same fund house shall be included in the portfolio.
- Each equity mutual fund scheme that is to be included in the portfolio should have seen an outperformance over at least three market cycles.
- You should restrict the count of equity mutual schemes in your portfolio to seven or eight.
Here are some of the best-performing equity mutual fund schemes you could consider for the Core & Satellite Portfolio with a 7 to 8 years investment horizon to multiply wealth.
Table: Best Performing Mutual Funds to Invest
|Canara Rob Bluechip Equity Fund
|Equity – Large Cap
|Parag Parikh Flexi Cap Fund
|Equity – Flexi Cap
|ICICI Pru Value Discovery Fund
|Equity – Value Fund
|IIFL Focused Equity Fund
|Mirae Asset Emerging Bluechip
|Equity – Large & Mid Cap
|Quant Mid Cap Fund
|Equity – Mid Cap Fund
|Quant Absolute Fund
|Aggressive Hybrid Fund
|S&P BSE 100 – TRI
|NIFTY 500 – TRI
|S&P BSE 500 – TRI
|NIFTY LargeMidcap 250 – TRI
|Nifty Midcap 150 – TRI
|NIFTY 50 – TRI
Data as of August 18, 2022
The best performers of the respective categories are considered based on past 5-year returns.
Returns up to 1 year are absolute, while for periods over a year are compounded annualised
Direct Plan and Growth Option Considered
(Source: ACE MF, PersonalFN Research)
Over the last 5 years, the aforementioned schemes have not only outperformed their benchmarks and broader markets but even their respective category peers. This is because of the respectable portfolio characteristics of these funds.
You see, if the Core & Satellite strategy is correctly applied, it can help you get the best of both worlds, that is, short-term high-rewarding opportunities and long-term steady returns. Besides, this investment strategy shall help you…
- Keep emotions at bay
- Take advantage of the higher margin of safety and stability of large-caps
- Capitalise on the potential high growth opportunities of small and mid-caps
- Reduce the need of churning the portfolio, especially the core portion
- Potentially earn higher returns over the long-term
- Mitigate downside risk
Given that the Indian equity market has remarkably moved up and is near the peak, you may consider taking the SIP (Systematic Investment Plan) route over the lump sum while following the Core & Satellite investment strategy. The inherent rupee-cost average feature of SIPs will help mitigate the volatility, instil the good habit of investing regularly in a disciplined manner, and over the long-term help compound money. Watch this video on the 5 benefits of starting a SIP.
This article first appeared on PersonalFN here