You want to invest in a good pedigreed equity fund for the long-term. So, should you opt for HDFC Top 200 (HT200) or HDFC Equity (HEF)? Both the funds have different strategies, but are managed by the same fund manager and belong to one of the better managed fund houses. Moreover, barely 2 percentage points separate their performances over the past three and five years. Both are a part of Mint 50. So how do you choose?
To check out a fund house’s track record and pedigree before you invest in it is a given. But what do you do if you land up with a bunch of good funds? How do you pick the first among equals? Knowing how difficult this answer is, Money Matters put together Mint50; Mint’s chosen set of 50 schemes across categories that we feel you should invest in.
But is that enough? Since Mint50 is an investment worthy set of funds, how do you further whittle down choice to the 6-12 schemes you need to have in your portfolio. Use this as a guide to pick the funds that suit your age, stage, risk profile and investment motive.
Investing to stay
Before any advice on what to pick, a note on how long to hold on to your investment. And this may sound a no-brainer, but is the most basic rule that we throw out of the window when it comes to equity investing.
Once you’ve made up your mind to invest in equity funds and take on the equity volatility risk, ascertain how long you wish to stay invested. The longer, the better, but experts recommend a time horizon of at least three years.
“You need to give time to your equity fund manager to perform and three years is a good period to check that. If you look at short-term performances and keep churning your fund regularly, you can miss out on the returns that may otherwise deliver in the long-term,” says Manish Gandhvi, zonal sales head (Mumbai), NJ India Invest Pvt. Ltd, one of India’s largest retail MF distributors.
Click here to see Equity-oriented funds from Mint50
Core and satellite
Every portfolio must have a core and satellite portion. The core portion consists of solid, long-term, no-frill performers in which you would expect to stay invested for a long term. The satellite portion of your fund would consist of exotic or thematic funds, such as infrastructure funds or those funds that have been launched recently compared with the time and tested ones. For instance, Religare Tax Plan (RTP)—an equity-linked savings scheme that offers tax deduction under section 80C—is a relatively new fund (it was launched in 2006). Its Mint50 peers, though with a slightly lower rating, have been around for a longer time.
A good strategy would be to first allocate your money to the tried and tested performers and then diversify to RTP if you have money to spare.
Active or passive
Actively managed funds carry fund manager risk. Stick to passive funds such as index funds or exchange-traded funds (ETF) if you wish to avoid this. With ETFs and index funds accounting for less than 1% of the Rs7.6 trillion Indian mutual funds industry, they are not as popular in India as they are abroad.
Mint50 has a good mixture of index funds and ETFs in large-cap as well as mid-cap categories. On account of a superior structure, ETFs charge lower fees than index funds. Stick to ETFs if you wish to save cost. There’s one downside though. Since ETFs are available only on stock exchanges, they do not allow systematic investment plans, a feature that most open-ended equity funds allow you to be able to invest a fixed sum every month. Go for index funds if you wish to invest systematically in the market.
Difficult to differentiate?
HDFC mutual fund’s chief investment officer Prashant Jain has been successfully managing HEF and HT200 for the past 10 years. Both invest significantly in large-cap stocks but take selective exposure in mid-cap scrips. While HT200 follows its benchmark index closely, HEF allows more freedom to the fund manager. Yet, their long-term performance is almost similar. Should you invest in both or can you pick one and be sure it will outperform the other?
“There is no way of separating the two and knowing for sure which will outperform the other. Frankly, it does not matter which of the two you choose as both are managed by the same fund manager and both are good pedigreed,” feels Rakesh Rawal, chief executive officer (wealth management), Anand Rathi Financial Services Ltd.
Look at style
However, DSP BlackRock Small Midcap fund and DSP BlackRock Equity—two mid-cap-oriented funds that are part of Mint50 differ in styles. While both invest in mid- and small-cap scrips, the latter prefers to invest half of its corpus in large-cap scrips, too. When styles differ, your work becomes easier as you need to choose the one that appeals to you the most.
Mid-cap and thematic funds are other ways to add different styles to your portfolio. Says Rawal: “Mid-caps can serve a role in your portfolio if you aim to stay invested for about seven to eight years or even more as they tend to give you good growth over the long-term.”
However, experts predict a cautious approach towards thematic funds. “Unless you can monitor themes by carefully scanning newspapers and following them and get your entry and exit points right, avoid playing themes,” says Sanjay Kumar Maheshka, chief executive officer, Prabhudas Lilladher Advisors Pvt. Ltd.