Diwali, the most popular festival in India, that symbolises the victory of good over evil, light over darkness, and knowledge over ignorance has arrived. It is a time for celebration, jubilation, and spending quality time with your loved ones. The fact that some individuals receive Diwali bonus from their employers acts like a cherry on the cake.
Receiving a Diwali bonus and cash gifts is arguably one of the most anticipated moments of the year for a majority of Indian households. The blueprint on how to spend that Diwali bonus and cash gifts is usually underway months before Diwali starts. The house needs a fresh coat of paint, the children want new gadgets, your wife perhaps wants to buy gold, etc.
While it is alright to splurge a portion of your Diwali bonus and cash gifts the way your heart desires, one must be mindful about the spending and avoid going overboard with unnecessary expenses.
As Diwali is considered a very auspicious occasion, you can consider deploying your Diwali bonus in investment avenues that will reap you fruitful gains in the future or top-up your retirement fund, prepay your debt, etc.
Investing your Diwali bonus in the best equity mutual funds could 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 expensive gadgets and other similar materialistic things, but we cannot live well if we are not financially secure and stable. This is why, ideally, the best use of your Diwali bonus and cash gifts is investing it in the best equity mutual funds.
How to use Diwali bonus to create a brighter and wealthier financial future?
Some of you might have apprehensions about what will saving a modest Diwali bonus amount 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
Rate of return assumed at 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 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 Fixed/Recurring Deposit, Public Provident Fund, etc.
Graph 2: Invest in wealth-creating investment avenues
Data as of October 20, 2022. Rate of return for Large-cap Fund, Mid-cap Fund, Small-cap Fund, PPF, and Bank FD assumed at 12%, 15%, 16.5%, 7%, and 6% respectively
The above chart is for illustration purposes only. Direct plan – Growth option considered for equity mutual fund returns.
Past performance is not an indicator of future returns.
(Source: PersonalFN Research)
In the past 7 years, large-cap equity mutual funds have generated a return of 12% as of October 20, 2022, as against the returns of around 7% and 6% generated by PPF and Bank fixed deposits, respectively. If you had invested your Diwali bonus of Rs 50,000 in large-cap funds every yeat, you would have created a corpus of Rs 9.8 lakh in 10 years against a relatively lower sum of Rs 7 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 10 years, then your corpus would be worth a mammoth Rs 12.7 lakh if your investment grows by 16.5%.
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.
As volatility and market movement go hand-in-hand, 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.
In 2007, the BSE Mid-cap index soared 68%, 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.
What is the best strategy you should follow to invest your Diwali bonus?
The best strategy to follow while investing your Diwali bonus is to invest in a diversified portfolio of best equity mutual funds by following the ‘Core & Satellite’ approach to investing.
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, Large & Mid-cap Fund, and Value 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 consists of aggressive mutual fund categories, such as Mid-cap Funds, 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.
Ensure that you decide the weightage in each of these sub-categories based on your risk profile, investment objective, and time horizon to the goal.
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 October 20, 2022
Direct plan – Growth option considered. Past performance is not an indicator of future returns.
(Source: ACE MF, PersonalFN Research)
The average 7-year returns of these six equity mutual fund categories considered is around 14% as of October 20, 2022, which is higher than what most other asset classes/investment avenues currently offer.
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
|Best Equity Mutual Funds
|Canara Robeco Bluechip Equity Fund
|Parag Parikh Flexi Cap Fund
|Large & Mid-cap Funds
|Mirae Asset Emerging Bluechip Fund
|ICICI Pru Value Discovery Fund
|Quant Mid Cap Fund
Returns are of Direct plans – Growth option. Past performance is not an indicator of future returns.
Data as of October 20, 2022.
(Source: ACE MF, PersonalFN Research)
1) Best Equity Mutual Funds to Invest your Diwali Bonus: Large-cap Category
As per the 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. For this very reason, Large-cap Funds should ideally form the ‘Core’ part of every investors’ portfolio. One of the best large-cap mutual funds to invest your Diwali bonus is Canara Robeco Bluechip Equity Fund.
Launched over a decade back in August 2010, Canara Robeco Bluechip Equity Fund has shown a complete turnaround performance in the last few years and registered an extraordinary phase to make it to the list of category outperformers. The fund managers’ strategy of sticking to index heavyweights that have been driving the index over the last few years has turned in its favour and paid off the investors with superior returns.
The returns generated by Canara Robeco Bluechip Equity Fund over the last 3-year, 5-year, and 7-year periods are far better than the category average and has also managed to generate alpha over the benchmark index.
This outperformance has come at a far reasonable risk when compared to the benchmark and category average, which highlights its potential of generating superior risk-adjusted returns even in stressful conditions.
Click here to read our detailed coverage on the features and performance of Canara Robeco Bluechip Equity Fund.
2) Best Equity Mutual Funds to Invest your Diwali Bonus: Flexi-cap Category
Flexi-cap mutual funds are mandated 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.
One of the best Flexi-cap Funds to invest your Diwali bonus is Parag Parikh Flexi-cap Fund. The fund was launched in 2013 and has managed to amass an AUM of Rs 26,033 crores as of September 30, 2022.
The fund’s orientation remains more towards the value style of investing, whereby it aims to invest in quality stocks across market caps available at reasonable or attractive valuations. The fund also holds some exposure to the stocks of offshore companies.
Over the last 3-year, 5-year, and 7-year period, Parag Parikh Flexi Cap Fund has delivered returns at a CAGR of around 24%, 17.6%, and 17.2%, respectively, thereby generating substantial alpha over its benchmark Nifty 500 – TRI and also outpacing most of its category peers.
The focus towards value stocks available at a decent margin of safety has helped Parag Parikh Flexi Cap Fund keep the overall volatility low, while its above-average performance has helped it to generate superior risk-adjusted returns for its investors.
Click here to read our detailed coverage on the features and performance of Parag Parikh Flexi Cap Fund.
3) Best Equity Mutual Funds to Invest your Diwali Bonus: Large & Mid-cap Fund Category
The SEBI has defined Large & Midcap 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.
One of the best Large & Mid-cap Funds to invest your Diwali bonus is Mirae Asset Emerging Bluechip Fund.
The fund looks to combine the stability of large-caps along with the growth of select emerging mid-sized companies which have the potential to become the future bluechips. Mirae Asset Emerging Bluechip Fund is known for its prudent investment approach that has helped it deliver superior risk-adjusted returns to its investors.
Mirae Asset Emerging Bluechip Fund’s long-term track record is exemplary wherein it has generated compounded annualised alpha of 2 to 3 percentage points over its benchmark Nifty LargeMidcap 250 – TRI. At the same time, it has outpaced most of its peers by a distinct margin.
The fund does not resort to taking aggressive calls, but maintains a diversified portfolio of quality stocks that are expected to benefit from the macroeconomic, industry, and sectoral trends and holds them with a long-term view.
Click here to read our detailed coverage on the features and performance of Mirae Asset Emerging Bluechip Fund.
4) Best Equity Mutual Funds to Invest your Diwali Bonus: Value Fund Category
Value investing is a time-tested strategy that involves identifying/finding stocks that are trading below their intrinsic value.
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.
One of the best Value Funds to invest your Diwali bonus is ICICI Pru Value Discovery Fund. Launched in August 2004, the fund currently has an AUM of Rs 25,196 crore.
ICICI Prudential Value Discovery Fund is a true-to-style value-oriented scheme that looks for undervalued stocks having the potential to deliver superior returns.
The fund currently stands among the top quartile performers in the category across time frames. Moreover, its risk-adjusted returns are among the best in the category and much ahead of the benchmark.
The fund’s cautious approach and strong inclination towards value helped it stand strong and limit losses during bearish phases. Moreover, the fund has outpaced the benchmark and many of its peers during market uptrends. The fund avoids investing in momentum-driven bets, which helps it to outpace its peers in the long run, while its large-cap bias adds stability to the portfolio.
Click here to read our detailed coverage on the features and performance of ICICI Pru Value Discovery Fund.
5) 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 in your Diwali bonus. 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 smaller/niche companies, they are less resilient during market downturns. However, they have the potential to 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 investing in these only if you have a high-risk appetite and an investment horizon of at least 5-7 years. One of the best mid-cap funds to invest your Diwali bonus into is Quant Midcap Fund.
Quant Midcap Fund is an actively managed small-sized scheme in the Mid-cap Fund category and follows aggressive investment strategies. Despite being small in size, the fund has registered extraordinary performance and handsomely rewarded its investors. In the last 1-year and 2-year periods, Quant Midcap Fund has outpaced the benchmark by a remarkable margin of around 15 percentage points and also outpaced most of its peers. It is now a top-performing midcap fund with superior returns across time frames.
Quant Midcap Fund constantly looks for opportunities across stocks and sectors and is also quick in its approach to shift allocation between market caps depending on the market conditions, which has resulted in significant alpha for its investors.
Considering the volatile and uncertain 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 regularly to ensure that your hard-earned money is always invested in the best equity mutual fund.
This article first appeared on PersonalFN here