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Learn How to diversify your portfolio with Equity Funds .

Introduction

Investors are now not limiting their investments to fixed deposits or stock markets. But they have also started investing in mutual funds. This gives them diversification. Diversification is necessary to balance the portfolio and minimise the risks.

There are a variety of mutual funds in the market. But Equity funds are the most preferred by investors to achieve their long-term goals.

What are Equity Funds?

Equity funds are those mutual funds that invest a majority of their funds in stocks of different companies. Equity funds are quite risky as they are based on market conditions. It generates higher returns as compared to fixed deposits and debt funds.

Diversification of Equity Funds

Even by investing in equity funds, you can diversify your portfolio. This diversification is explained as under: -

Investment Strategy Based Diversification

Investments in equity mutual funds can be diversified based on investment strategy.

Theme and Sectoral Funds An equity fund may follow some particular sector or some particular theme for investing. When the fund follows a particular sector like banking, pharmaceutical, IT, etc., it is defined as a sectoral fund. On the other hand, if funds follow a specific investment theme like healthcare, international stocks etc then they are defined as thematic funds. Both the theme and sectoral funds carry high risk as here the investment is based on a specific sector or theme. As per SEBI guidelines, these funds should invest at least 80% of their assets in equity funds.

Focused Equity Funds Focused equity funds are those funds that can invest up to 30 stocks of the companies as per the market capitalisation determined at the time of launch. As the number of stocks in this fund is limited to 30 so it carries high concentration risk. If the stock selection by the fund manager in these funds is good enough then these funds can give higher returns.

Contra Equity Fund The schemes of these funds follow a contrarian strategy of investing. Under this scheme, the underperforming stocks are purchased at lower prices. This is because there is an expectation that these stocks will perform well in the long term.

Market Capitalisation-Based Diversification

Investments in equity funds can also be diversified on the basis of market capitalisation.

Large Cap Funds This fund invests in the top 100 companies with respect to market capitalisation. Here 80% of total assets are invested in large-cap companies. Large-cap funds carry less risk and give higher returns.

Mid Cap Funds Here 65% of total assets are invested in equity shares of midcap companies. These are those companies that are ranked 101-250th as per market capitalisation. Mid-cap funds are found to be more volatile than large-cap funds. But gives higher returns.

Small Cap Funds Small-cap funds are those funds that invest 65% of their assets in equity shares of small-cap companies. These companies are ranked 251st and below as per market capitalisation. This fund has a high potential to give higher returns in the long term.

Multi Cap Funds Multi-cap funds are those funds that invest at least 65% of the assets in equity shares of different categories of companies in varied proportions. This includes mid-cap, small-cap and large-cap companies. The fund manager here keeps a close eye on the portfolio and brings changes as and when required.

Large Cap and Mid Cap funds Under these funds, 35% of assets are invested in large-cap stocks and 35% of assets are invested in midcap stocks. The remaining assets are allowed to be invested in any market cap segment. These funds are less volatile and hence offer better returns.

Tax-Treatment Based Diversification

Diversification in equity funds is also possible based on tax treatment.

Equity Linked Savings Scheme (ELSS) ELSS scheme is a diversified equity fund which has a lock-in period of 3 years. It also gives tax benefits up to ₹1.50 lakhs under section 80C of the IT Act. Under this scheme, at least 80% of assets are invested in equity and equity-related instruments. This is the best equity fund if you want to save tax.

Non-Tax Savings Equity Funds Apart from ELSS, all other equity funds are non-tax savings schemes. The returns will be subject to capital gain tax.

Investment Style-Based Diversification

Equity fund diversification is also possible on the basis of investment style.

Active Funds The active fund includes those equity schemes that are managed by fund managers. Here fund managers apply their knowledge and experience and select the stocks for investing.

Passive Funds Passive funds are those funds that invest in stocks on the basis of a particular index or segment. Here fund manager is not involved actively.

Conclusion

If you are someone who invests in equity funds then this is the best article for you. As it guides you that how can you diversify your portfolio with equity funds. This will help you to reduce the risk and achieve timely goals.

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How to track the performance of your ELSS investments?

As an investor, you know how beneficial and profitable ELSS Mutual funds can be. ELSS, or Equity-Linked Savings Scheme, is a mutual fund where you can deposit a particular principal and get equity back.

It comes with a mandatory lock-in period of 3 years, so you will need more flexibility to withdraw money during these years. Once the lock-in period is over, you can withdraw the money quickly.

What is ELSS performance tracking?

Since most ELSS Mutual funds are for the long-term, you should check their performance during the lock-in period. With this, getting maximum returns from the fund or saving the taxes will be possible. For instance, suppose you chose three ELSS, namely A1, A2, and A3.

Now, if only A1 performs better than A2 and A3, you will only get the desired returns from A1. If you try to sell your shares in A2 or A3 funds, you will make a deal in the loss. So, you must make the right decision based on the performance tracking report.

Determinant factors for ELSS fund performance

There are three ratios with which you can check the performance of the ELSS Mutual funds. In the below section, we briefly describe them for your better understanding.

1. Sharpe ratio:The Sharpe ratio is the best determinant for calculating ELSS investment returns. It is defined as the ratio of the additional return you can earn as an investor for every unit risk the fund takes. The fund will offer higher returns per unit risk if the Sharpe ratio is higher with a positive value. On the contrary, if the Sharpe ratio is negative, your returns won’t be profitable, and it would be best to invest in risk-free ELSS.

2. Standard deviation: You can quickly check the volatility of the returns on ELSS investment with standard deviation. Both volatility and standard deviation are considered to be directly proportional to one another, which means if the deviation value increases, the fund's returns will be volatile. In other words, the concerned fund won’t offer to hedge against market changes, and your investment might be lost. That’s why try to choose an ELSS fund having a lower standard deviation.

3. Jenson Alpha:Another determinant to track the returns on ELSS investment is the Jenson Alpha ratio. You can quickly determine the value with the benchmark index and the concerned calculator. For instance, if the Jenson Alpha ratio for the A1 fund is 8.50 and for A2, 2.35, you should invest in A1. This is because a higher Jenson Alpha ratio means better and secured returns on the investment.

Why use the ELSS calculator to track its performance?

Although the three ratios mentioned above are accurate determinants, you should use the ELSS calculator to know the potential performance of the funds. Here, you can quickly know the total amount you will get as the returns from a particular fund and whether it is volatile.

When you choose the ELSS calculator, you must check its reliability and authenticity. Apart from this, you also need to consider if you want to invest in SIP or lump sum funds for ELSS and accordingly select the calculator. It would be best to choose SIP because it is much safer and not exposed to the vulnerabilities of the share market.

On the other hand, any ELSS fund with a lump sum investment would involve more significant risks and higher returns, provided the price action movement and market trends are in your favour.

Conclusion

You can quickly determine your investment returns with the ELSS calculator and three determinant ratios. These are the Sharpe ratio, standard deviation, and Alpha Jenson number. So, before you invest in ELSS, use these ratios to compare the funds and take reference from the calculator to decide the fund’s performance.

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Which are the Top Performing Flexi Cap Funds?

The market for mutual funds is on a constant rise. Investors are constantly looking for dynamic equity schemes. Therefore, on November 6, 2020, SEBI or the Securities and Exchange Board of India announced a form of equity scheme known as the Flexi cap funds for investors who are not much interested in taking risks. 

What are Flexi Cap Funds?

Flexi-cap funds, which are similar to multi-cap mutual fund schemes are investment plans in which investments are made across large, mid, and small-cap companies. At least 65% of the fund is invested in equities, whereas the rest is spread across multiple stocks of different sizes. Therefore, such open-ended mutual fund schemes promise diversified approaches across different market caps within their portfolios. 

What are the benefits of investing in the Flexi Cap Funds?

Flexi Cap Funds come with a creditable number of benefits that ensure a great return from investment in schemes. 

The top Flexi-cap funds invest in firms of various sizes which are spread across different sectors. This gives the investors a better understanding of and ability to allocate investment across different sectors within the Indian economy.

It is ideal for an investment period that is more than 5 years. As the multi-cap funds are investments in equities, they are not much profitable for short-term investments. However, an investment on a long-term basis reduces the possible risk to a great extent. 

The best Flexi-cap mutual funds give investors access to all the different sectors. This lessens the need to have to look into different funds as this particular form of mutual fund scheme gives a comprehensive as well as diverse market coverage. 

The flexibility guaranteed by the Flexi cap funds gives the investors the option to alter in case there is a change in the market conditions. 

Top Flexi Cap Funds

The following are some of the best Flexi-cap mutual funds, depending on their AUM (Assets under management) size and net asset value (NAV). 

UTI Flexi Cap Fund

This particular fund is controlled by Bajaj Finance Ltd., ICICI Bank Ltd., Kotak Mahindra Bank Ltd., HDFC Bank Ltd., and Infosys Ltd with a fund size of AUM of ₹7,263 Crores as of 31/03/2022 and a NAV of ₹219.72 as of June 10, 2022. While the expense ratio is 0.48 percent, the annual returns are 13.88 percent per year. 

2. Franklin India Flexi Cap Fund

With top holdings by ICICI Bank Ltd., Axis Bank Ltd., Infosys Ltd., HDFC Bank Ltd., and Bharti Airtel Ltd., Franklin India Flexi Cap Fund is a widely regarded fund scheme. Since its launch, the annual growth return has been 17.56 percent per year on average. The expense ratio is around 1.87 percent. The fund value is 9,492 Crores as AUM on 31/03/2022 with a NAV of ₹885.43 as of June 10, 2022.

3. Parag Parikh Flexi Cap Fund

The fund's AUM is set at ₹ 27,712 Crores with a NAV of ₹ 52.34 as of November 14, 2022. The fund's expense ratio is 0.76 percent. Companies like Bajaj Holdings & Investment Ltd., Housing Development Finance Corpn. Ltd., ITC Ltd., ICICI Bank Ltd., and HCL Technologies Ltd., make up its holdings. 

4. Aditya Birla Sun Life Flexi Cap Fund

The fund has an AUM of ₹15,003 Crores and a NAV of ₹1,020.54 as of June 10, 2022. Its expense ratio is marked at 1.82 percent. With an average annual return of 21.45 percent since its beginning, its top holdings are ICICI Bank Ltd., HDFC Bank Ltd., Infosys Ltd., Dr. Reddy's Laboratories Ltd., and Bharti Airtel Ltd.

5. HDFC Flexi Cap Fund

With an expense ratio of 1.71% and an exit load of 1%, its top companies include the State Bank of India, ICICI Bank Ltd., HDFC Bank Ltd., Infosys Ltd., and Reliance Industries Ltd. The fund value of the fund is around ₹27,433 Crores in assets under management (AUM) and a NAV of ₹986.21 as estimated on June 10, 2022.

6. SBI Flexi Cap Fund

The most attractive factor is the expense ratio of the fund which is marked at 1.85 percent, quite high when compared to that of other funds. ICICI Bank Ltd., HDFC Bank Ltd., State Bank of India, ITC Ltd., and HCL Technologies Ltd. are the top holdings. It also has a high AUM of ₹15,047 Crores in assets as of 31/03/2022 and a NAV of ₹70.25 as of June 10, 2022. 

7. PGIM Flexi Cap Fund

ICICI Bank Ltd., HDFC Bank Ltd., Infosys Ltd., Axis Bank Ltd., and National Thermal Power Corp. Ltd., are the top holdings of this fund whose expense ratio is set at 0.31 percent. The fund's AUM is around ₹5,291 Crores as of 30/09/2022 and a NAV of ₹ 28.97 as of November 14, 2022.

Conclusion

Just like in any other form of investment, investment in top Flexi-cap funds too needs in-depth knowledge and study. Market-savvy investors with higher risk tolerance must try investing in the best Flexi-cap Funds. This is far more suitable for those willing to earn more profit through investment in a diversified stock portfolio.