No matter what you looking for, there will be a type of fund to suit your needs. Here we look at the types of equity funds and how you should select them.
1) ELSS Funds
An equity linked savings scheme, or ELSS, is a tax saving vehicle as well as an equity instrument. Such funds have diversified portfolios where the fund manager can invest in stocks of his choosing – small, mid and large caps from all sectors. This tax saving instrument (which gives a tax benefit under Section 80C) has the shortest lock in period of just three years, when compared to instruments like NSC and PPF.
As with any fund investment, when narrowing down on a pick, an error investors are prone to make is opting for the most recent chart topper. Despite the bold disclaimers about past performance not necessarily being sustained in the future, investors have a hard time resisting that lure. And when that is employed as a sole parameter, it's not uncommon for disillusionment to set in rapidly. Look at consistency of returns over long time periods.
Don't forget to check the portfolio to see whether the fund has a large-cap or mid-cap bent. Also see how diversified or concentrated the portfolio is. Remember, all ELSS funds are identical in terms of the lock-in period and the tax benefit, but there will be stark differences in terms of portfolio composition.
2) Sector funds
Sector funds concentrate their investments in a single sector, such as FMCG, financial services, healthcare and technology. These are sectors which an investor would find represented in a diversified equity fund.
By and large, investors should steer clear of sector funds altogether, because not only are you betting on a single sector, but you're betting heavily on a few companies.
Invest in such funds only if you have a well thought out strategy. If you have a strong view on a sector and want to give your portfolio a tactical slant, consider such a fund. But do not gravitate towards the flavour of the year, and when you bet on a sector, stay in for the long haul.
For instance, energy funds (Morningstar category: Sector – Energy), put up a stellar performance in 2007 with a return of 105% that year. Investors flocked to them. The next year the category average was -53%. While it bounced back in 2009, its returns in 2010, 2011 and 2013 were abysmal. Last year it made a comeback with a return of 47%, but still a far cry from its 2007 feat. The volatility of such funds is much more than a regular equity diversified fund.
3) Equity Funds
These funds are exactly what their name signifies – they invest across sectors. However, investors will need to look at the market cap.
Funds focused on small- and mid-cap stocks should not be the core holding in your portfolio. Neither should flexi-cap funds. The latter are funds that are not biased towards either large- or mid-cap stocks but stack up stocks in their portfolio wherever they see opportunity. What should be a core holding in your portfolio is one or two large-cap funds.
A core holding is the central part of your portfolio. The main primary purpose of such funds is to provide a stable base that does not require much adjustment. They're the solid foundation for the rest of a portfolio. The non-core funds, such as sector and mid cap funds, can be the more volatile offerings that help boost overall returns.
4) Global funds
This category is extremely diverse. Some global funds can be categorised as sector funds that scout for stocks globally. For example, a gold fund would invest in gold mining stocks across the globe. In a similar vein you have funds focused on stocks in specific areas - mining, commodities, agriculture and energy.
There could be funds focused on a particular geography such as Europe, Asia, Brazil, China, Japan or the U.S. They could also be thematic by looking at emerging markets.
Approach such funds the way you would approach a sector fund. Be convinced of why you want exposure to such a sector or geography or theme. Let this be a non-core holding in your portfolio.
5) Hybrid Funds
Here you have balanced funds which allocate at least 65% of their portfolio to equity, so that for tax purposes they can qualify as equity funds.
These are great funds for investors starting out as they get an automatic allocation to debt and equity by investing in one fund. Or, if an investor already has an equity fund and wants a meager exposure to debt in his portfolio, he could opt for a balanced fund.
The aim of such funds is not to shoot out the lights when the equity market is on a roll, but neither should it crumble like a pack of cards when the market falls. It should provide a more balanced ride than an equity fund. So when looking for a fund, check the volatility in its returns over such market periods.
Top 10 Tax Saving Mutual Funds to invest in India for 2016
Best 10 ELSS Mutual Funds in india for 2016
1. BNP Paribas Long Term Equity Fund
2. Axis Tax Saver Fund
3. Franklin India TaxShield
4. ICICI Prudential Long Term Equity Fund
5. IDFC Tax Advantage (ELSS) Fund
6. Birla Sun Life Tax Relief 96
7. DSP BlackRock Tax Saver Fund
8. Reliance Tax Saver (ELSS) Fund
9. Religare Tax Plan
10. Birla Sun Life Tax Plan
Invest in Best Performing 2016 Tax Saver Mutual Funds Online
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