How equity mutual funds are beating all other assets

After being in years of stupor, the stock market, represented by the BSE Sensex, finally gained some ground in 2014 owing to the election of a strong government at the Centre and big-bang reform announcements. From March 2014 to the period ended March 2015, the markets went up from 22,400 to 28,500 levels. Although this translates into an outstanding return of 25 per cent annually, mutual funds (MFs) investing in the stock market have done far better.

The equity MF category outshined any other asset class, debt or gold for instance, for the year ended March 2015 with large cap funds delivering average returns of 31 per cent, the large and mid cap funds 43 per cent and the multi cap funds 48 per cent. The clear outperformer of the year is the mid and small cap category of funds, which delivered 67-per cent returns followed by tax planning funds at 47 per cent.

In spite of the phenomenal returns, investors must understand that these returns average out over the long run and investment should be made based on your risk profile and investment objective. If you are a first time investor, large cap diversified equity MFs are for you since they come with lower volatility compared to the other category of equity funds.

Investing through the systematic route and diversifying across asset classes is the best way to deal with market volatility and benefit from it. Sector funds, for instance, are highly dependant on the sector's performance, which might differ in degree and direction during different cycles.

Investors should understand that due to cyclical nature of businesses, few sectors are likely to do better than others at any given point in time. Investors who can stomach market volatility and have a long-term investment horizon may allocate a portion of their portfolio to sector funds or thematic funds; equity as such is a volatile asset class and these funds are even more volatile. Ideally, one can manage this volatility by increasing the time horizon of investment beyond five years.

Amongst the sectoral fund categories, pharmaceutical funds posted 67 per cent returns to top the charts. Health care companies are known to have secular businesses with high-return ratios and strong competitive advantages. Infrastructure funds were close with 52-per cent returns as the government's thrust on infrastructure spends and revival of economic growth aided the performance of the stocks within this sector.

Banking funds too ranked close returning 41 per cent owing to the reduction in the key interest rates i.e. the repo rate by 75 bps (the rate at which banks borrow from the Reserve Bank of India) thus lowering the pressure on the banking system. However, the sector was plagued by the underperformance of public sector banks owing to high nonperforming assets (NPAs).

(Mail Today)