Data from Value Research analysed on five-year, three-year and one-year performances of active equity schemes to pick the best performers in popular scheme categories.
The end of 2024 marks the completion of a crucial five-year period for mutual funds.
The industry, which bore the brunt of the pandemic like every other business at the start of the decade, charted a new growth path soon after.
Multiple factors drove growth, but the performance of active equity schemes stood out.
This period of growth came after the 2017 reclassification of active equity schemes -- a reform that made it easier for investors to identify the top performers across scheme categories.
The first half of the decade is a fair period for comparative performance analysis.
We analysed data from Value Research on five-year, three-year and one-year performances of active equity schemes to pick the best performers in popular scheme categories.
Largecap funds
It is the fourth-biggest category, having more than Rs 3.5 trillion worth of assets under management (AUM) and 32 schemes.
Category schemes have to deploy at least 80 per cent of their assets in largecap companies.
Companies ranked between 1 and 100 in terms of their full market capitalisation are defined as largecaps.
Once the leading fund category, largecap funds have seen their share in active schemes drop over the years as investors opted for higher-risk offerings like smallcap and thematic funds.
Largecap schemes have struggled to beat their benchmarks due to several factors: Improved market efficiency, limited investment universe, higher expense ratios and other portfolio limitations.
Midcaps
The category gives investors an opportunity to buy emerging or potential largecaps.
The category has 29 active schemes that together manage Rs 3.9 trillion.
Schemes have to deploy nearly two-thirds of their corpus in midcap companies -- those ranked between 101 and 250 in the marketcap pecking order.
Unlike largecap funds, the majority of active midcap schemes have outperformed their benchmark indices.
In the last one-year, some of the midcap schemes have delivered the highest returns among all major categories.
This in turn has attracted strong flows and a gush of investors.
Midcap schemes' consistent outperformance compared to their benchmarks is largely due to a relatively larger universe, which gives fund managers to look for undiscovered opportunities.
Smallcaps
Smallcaps schemes are the current favourites of retail investors, who are piqued by their strong performance.
The category has some of the top performing schemes across categories. Among the active schemes, however, there is a high divergence in performance.
In the last one year, the top fund has delivered 58 per cent and the one at the bottom of the return rankings only 25 per cent.
The divergence shows the importance of scheme selection, especially when investing in the midcap and smallcap categories.
Large and midcaps
Despite flying under the radar, the category has garnered strong inflows over the years and manages Rs 2.6 trillion.
These funds suit investors wanting to take exposure in blue chip and emerging companies.
These schemes invest a minimum of 35 per cent each in largecap and midcap stocks.
The recent performance of midcap stocks has lifted the returns of large and midcap funds, with the top scheme in one-year return rankings having delivered as much as 52 per cent.
The annual returns of top rankers in the one-year, three-year and five-year period have been good, ranging between 25 per cent and 30 per cent.
Flexicaps
Flexicap schemes are recommended to people starting their mutual fund investing journey, as they provide optimal exposure to stocks in all the three market-cap segments.
Most schemes maintain around 60 per cent exposure to largecap stocks and deploy the rest in mid and smallcaps.
The mix has worked well at least in the past five years, with the majority of the schemes outperforming.
The flexicap category was introduced in 2020 and went on to become the largest equity fund category in early 2023.
The category has recently slipped to the second space in terms of AUM size.
ELSS
Equity-Linked Savings Schemes (ELSS) are similar to flexicap schemes, except for their three-year lock-in mandate.
This is the only scheme category that comes with a tax advantage: Investments qualify for exemptions under Section 80C of the Income Tax Act.
However, with the government introducing a new tax regime, the category has lost appeal.
The category has 42 schemes that manage Rs 2.4 trillion. Given that the fund structure is similar to flexicap funds, the returns are also comparable.
Multicap
The category 28 schemes, relatively few, as most fund houses had moved their multicap funds to the flexicap category after Sebi, the market regulator, introduced the latter in 2020.
Most multicap funds were launched in the last two years. As a result, there are only a few offerings with a five-year track record.
Even though multicap funds also invest across largecap, midcap and smallcap stocks like flexicap and ELSS do, they carry a higher risk.
These schemes have to invest at least 25 per cent each in largecap, midcap and smallcap stocks.
Focused
Focused funds are especially for fund managers to take conviction calls as the number of stocks is capped at 30.
This fund is especially suited for investors wanting to bet on a fund manager.
However, the higher concentration and flexibility makes it among the riskiest equity fund options.
There are 28 schemes in the category with assets under management of Rs 1.5 trillion.
Value funds
The schemes invest in stocks that appear underpriced compared to their true values.
There are 23 schemes in the category and they manage around Rs 1.9 trillion in assets.
Value as an investment style has done well after the pandemic, resulting in strong performance of such schemes.
However, the outperformance came after a long period of underperformance.
Value fund schemes are considered riskier largely because the underperformance cycle can last for years.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
How To Turn 1 Cr Into 100 Cr
How To Make Rs 15 Cr From Rs 20k SIP
How To Make Rs 1 Cr With This SIP
MFs Vs NPS? What Suits YOU?
How To Become A Crorepati: 15x15x15