In the game of Investing, where returns are essentially important, somehow risk-adjusted returns is what eventually counts. And to strengthen the risk-adjusted returns if one has a long-term view, diversified equities can prove to be beneficial. Diversified funds have historically proven to come out as a winner in most market conditions given long holding periods. They invest across all spectrums of capitalization, within permitted risk levels. But are these funds for you? Let’s find out.
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Diversified Equity Funds, also known as Multi-cap or Flexi cap funds, invest in stocks of companies across market capitalization i.e.,-large cap, mid and small cap stocks. In other words, they have the flexibility to adapt their portfolios according to the market. They typically invest anywhere between 40-60% in large cap stocks, 10-40% in mid-cap stocks and about 10% in small-cap stocks. Sometimes, the exposure to small-caps may be very small or none at all.
Diversified funds do not have any limitations on market caps from an investment point of view. They don’t follow a sectoral approach, instead adopting a growth or Value investing strategy, buying stocks whose price are relatively lower to their historical performance, Book Value, earnings, cash flow potential and dividend yields.
These funds balance out the risk and reduce the volatility that usually comes with stock investments by investing across market capitalizations and sectors. Larger companies (large caps) tend to perform better during tough market times than the smaller companies, and they can provide investors with better investment returns. Mid-cap stocks can stabilize portfolio returns with higher growth potential than the large cap stocks and less risky than the small cap stocks. However, irrespective of the market caps, all stock investments carry a certain level of risk, and investors should closely monitor their investments as business conditions can change daily. Given that the underlying investment is equity, there is a risk of loss of capital that can occur in the short term.
Nevertheless, diversified funds have exceptionally performed well over past 5 years, especially after elections, returning 23% p.a. and 21% p.a. for the last three and five years, respectively.
As diversified funds or multi-cap funds invest across market caps, they have several benefits compared to funds focused on any one particular market cap. Some of these are discussed below:
Diversified funds may suffer massively if the moves are extreme, during falls of the markets, diversified funds are affected from than large caps. This is due to the fact that during most declines, the fall in small & mid-caps is much higher. This can lead to higher volatility of returns, causing these funds to have a higher Standard Deviation, which is one of the important parameters to measure a fund's risk. Larger the standard deviation, higher will be the level of risk.
An investor who has a moderate-risk appetite and who wishes to have an exposure in equities can park their funds in diversified funds. Also, investors who are not well-versed with the technique of Asset Allocation in respect to investments can also put a part of their funds here.
Investors incline towards investing in these funds as it holds a mix of stocks across market capitalizations. Any high degree of volatility shown by either small cap or mid cap funds can be balanced by the stability provided by large-cap equity funds. However, the returns from such diversified funds are vastly dependent on the fund manager’s knowledge and intelligence as to how he is able to include stocks as per the market conditions. In this situation, there is a probability of fund manager going wrong in his allocation strategy. That is why it is advisable for investors to study the record of the fund manager before investing in diversified funds.
As per the Budget 2018 speech, a new Long Term Capital Gains (LTCG) tax on equity oriented Mutual Funds & stocks will be applicable from 1st April. The Finance Bill 2018 was passed by voice vote in Lok Sabha on 14th March 2018. Here’s how new Income Tax changes will impact the equity investments from 1st April 2018. *
LTCGs exceeding INR 1 lakh arising from redemption of Mutual Fund units or equities on or after 1st April 2018, will be taxed at 10 percent (plus cess) or at 10.4 percent. Long-term capital gains till INR 1 lakh will be exempt. For example, if you earn INR 3 lakhs in combined long-term capital gains from stocks or Mutual Fund investments in a financial year. The taxable LTCGs will be INR 2 lakh (INR 3 lakh - 1 lakh) and tax liability will be INR 20,000 (10 per cent of INR 2 lakh).
Long-term capital gains are the profit arising from selling or redemption of equity funds held more than a year.
If Mutual Fund units are sold before one year of holding, Short Term Capital Gains (STCGs) tax will apply. The STCGs tax has been kept unchanged at 15 percent.
|Equity Schemes||Holding Period||Tax Rate|
|Long Term Capital Gains (LTCG)||More than 1 Year||10% (with no indexation)*****|
|Short Term Capital Gains (STCG)||Less than or equal to a year||15%|
|Tax on Distributed Dividend||-||10%#|
*Gains up to INR 1 lakh are free of tax. Tax at 10% applies to gains above INR 1 lakh. Earlier rate was 0% cost calculated as closing price on Jan 31, 2018. #Dividend tax of 10% + Surcharge 12% + Cess 4% =11.648% Health & Education Cess of 4% introduced. Earlier, education Cess was 3%.
Top performing diversified funds in India are as follows-
Fund NAV Net Assets (Cr) 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 5 YR (%) 2018 (%) Mirae Asset India Equity Fund Growth ₹51.761
₹10,560 7.5 11.1 11.1 17.9 18.6 -0.6 Kotak Standard Multicap Fund Growth ₹35.787
₹21,682 7.8 12 8.3 16.7 19 -0.9 Motilal Oswal Multicap 35 Fund Growth ₹26.1266
₹12,702 5.3 9.7 -4.1 15.4 -7.8 Aditya Birla Sun Life Equity Fund Growth ₹741.02
₹10,027 5.7 10 3.4 15.8 18 -4.1 SBI Magnum Multicap Fund Growth ₹49.0728
₹6,455 6.1 10.9 2.6 13.8 18.7 -5.5 JM Multicap Fund Growth ₹31.3345
₹128 6.4 9.4 2.4 15.6 16.5 -5.4 Principal Multi Cap Growth Fund Growth ₹145.09
₹808 5 7.5 -1 16.3 16.8 -8.7 L&T Equity Fund Growth ₹82.82
₹2,518 4.9 6.6 -1.1 12.2 14.2 -4.5 BNP Paribas Multi Cap Fund Growth ₹46.956
₹743 5.7 7.7 -2.3 11.8 15.7 -12 IDFC Focused Equity Fund Growth ₹37.02
₹1,529 4 3.8 -7.4 14.3 11.8 -12.7 Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 16 Apr 19
When making a long-term investment, investors are advised to take into account their risk appetite. Investors who wish to invest in equity funds should smartly allocate funds to their portfolio. However, there are no hard and fast rules, investors should see the level of risk they can take and then decide the funds to invest. Investors could thoroughly study these funds and invest according to their investment objectives by adding the Best diversified funds to their portfolio.
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