Comparison Of Equity Mutual Funds In India

Today, mutual funds have become one of the foremost investment instruments for a large number of small investors in the country. According to the Association of Mutual Funds in India (AMFI), mutual funds are the most suitable investment for the common man. A mutual fund generates market returns for investors by enabling them to utilise the skills and resources of a fund house/asset management company. It provides an investor with an opportunity to diversify his/her portfolio at a relatively low cost, besides some taxation benefits.

Mutual funds can be classified in two ways – structurewise and assetwise. Assetwise, they are divided into Debt, Equity and Hybrid schemes. The appropriate choice of scheme is essential for an investor to achieve his/her investment objectives. This choice has to be made keeping one's risk appetite, income and the end use in mind. In this article, we explore a few important types of equity schemes – schemes that invest in stocks or equities of companies – and find out how they performed against the benchmark indices in recent times.

Equity-Linked Tax Saving Funds

These schemes lay a greater emphasis on saving tax along with providing equity-linked growth. Investments of up to Rs. 1 lakh in these schemes (ELSS) are liable for tax benefits under Section 80C of the Income Tax Act. However, investment in these funds is locked in for a period of three years. Some of the top-line schemes in this category are Birla Sun Life Tax Relief 96 – Dividend, HDFC Tax Saver – Growth, ICICI Prudential Tax Plan – Growth, Baroda Pioneer Diversified Fund- Growth and Canara Robeco Equity Tax Saver- Dividend.

We will now take a look at the average returns these schemes have generated as against the benchmark indices during the same period.

The table shows that returns from these schemes correlate with that of the benchmark indices. These schemes, however, have not been able to outperform these indices. But it was not that bad, as they made up for this by offering tax benefits.

Index Funds

Index funds are so called because they try to track and replicate the performance of a benchmark index. They have the same portfolio as that of an index, and thus are also known as passively-managed funds. The effectiveness of these schemes is measured by the closeness to which they track the benchmark index. The schemes here are based on BSE Sensex or CNX Nifty. Some of the first-rate schemes in this category are HDFC Index Fund – Sensex Plan, HDFC Index Fund – Sensex Plus Plan, Reliance Index Fund – Sensex Plan, Birla Sun Life Index Fund (NIFTY) and ICICI Prudential Index Fund (NIFTY). Now, let's understand how these funds have performed in comparison to the benchmark indices from the following table:

Generally, it is unlikely that an index fund outperforms or underperforms an index. But as per the table above, index funds have managed not only to replicate the performance of the benchmark indices over a period but even outperform them.

Large Cap Funds

Large cap funds invest in stocks of big blue-chip companies, especially those which are a part of the benchmark BSE 30 or NIFTY 50. These companies can also be leaders in their sector. These funds are considered safe with low risk and low returns. The scope of these funds varies from scheme to scheme. Some of the reckoned names in this category are Birla Sun Life Advantage Fund Growth, HDFC Equity Fund Growth, ICICI Prudential Focused Equity Fund Growth and IDFC Imperial Equity Fund Growth. The average performance of these funds is presented against that of benchmark indices in the following table:

It is clear from the table that large cap funds have outperformed the benchmark indices over the past few years. The prime reason could be the investment done in the stocks of companies with strong financial. These companies are able to perform better than their peers in both conditions during economic downturns as well as upturns. It is this factor that leads to higher returns on the stocks of these companies, and makes the fund most sought-after among investors.

Mid Cap Funds

Mid cap funds invest invariably in stocks of medium-sized companies, i.e., companies with a market capitalisation between Rs. 500 crore and Rs. 1,000 crore. The idea is to pick stocks that have significant growth potential. These investments involve a higher level of risk than large caps and index stocks but they also provide higher returns. Some of the top-notch schemes in this category are Birla Sun Life Mid Cap Fund, DBS Chola Mid Cap Fund, DSP Blackrock Small and Mid Cap Fund. So, how did they do as compared to the benchmark indices, let's check out:

As we can see, in spite of the higher risks associated with them, mid cap stocks have not managed to beat the main indices on a long-term basis. In the recent term, however, they have clearly outperformed the indices. This suggests that consistency is an issue with mid cap schemes and the choice of the scheme should be made carefully to ensure the best returns.

In conclusion
Selecting a scheme carefully within a particular category is the first step of investing in mutual funds. It is imperative for an investor to evaluate performance of the scheme vis-à-vis its peers and also check for consistency before making a decision.

Over the past few years, large cap funds have given a stellar and consistent performance among equity schemes. It has been seen that robust fundamentals of the companies and preference of these stocks by foreign institutional investors are the two factors that have contributed largely in the success of large cap funds. These funds become even more appealing if we consider the fact that they are associated with lesser risk as compared to mid cap and sector-specific funds.