Investment Foundation for Your Diverse Mutual Fund Asset Collection
In the dynamic world of investments, choosing the right funds for your portfolio is crucial. One essential aspect of portfolio management is identifying the best core equity funds. These funds form the main part of an investment portfolio, where the majority of money is parked.
The Role of Core Funds
A core fund should have two attributes: generate good returns and provide stability, with minimal restrictions on investment. These funds take care of the returns and stability of the overall portfolio, while satellite funds help boost returns or diversify better.
The Best Core Equity Categories
The categories that qualify as core funds include Large-cap, Large & mid-cap, Flexi-cap, ELSS, and Focused funds. Among these, large-cap core funds are typically the best choice. They offer a balance of growth and stability appropriate for the core portion of a diversified portfolio.
Large-cap core funds have shown moderate returns with lower volatility compared to more specialized or smaller-cap equity categories. For instance, a quarter return of about 9.9%, a year-to-date return of around 5.7%, and a trailing twelve months return near 12.9% are typical for large-cap core funds [4].
However, it's important to note that active large-cap core funds may lag their benchmarks by about 1-3% in some periods [4]. Despite this, large-cap core funds exhibit lower volatility and steadier returns compared to mid and small-cap funds, which often have higher volatility and more variable performance due to less diversification and greater sensitivity to market swings [2][4].
The Standout Performers: Focused Funds
If we look at both the average returns and the volatility, focused funds clearly stand out. They deliver higher returns at lower volatility compared to other core fund categories [5]. In fact, focused funds have exhibited the lowest volatility, with their standard deviation being the same as the Nifty 50 [6].
Making an Informed Decision
When deciding on core funds, it's essential to consider your risk tolerance and investment goals. Large-cap funds are suitable for those who prefer lower volatility with their core funds. However, if you're looking for higher returns and can handle a bit more risk, you might want to consider large & mid-cap or focused funds [1].
It's also worth noting that ELSS funds, while they can act as a core fund for tax-saving purposes, have shown higher volatility for comparatively lower average returns [7].
In summary, large-cap core equity funds, often implemented through low-cost index or active strategies, are widely regarded as the best core equity category due to their balanced risk and return profile. Smaller and less diversified equity categories tend to be more volatile and are better suited as satellite or complementary holdings.
[1] Core portfolios can combine passive index funds, active funds, and direct indexing to capture different benefits such as low costs, potential outperformance, and tax efficiency. [2] More concentrated funds or those investing in smaller companies can generate attractive returns but come with higher volatility and risk, making them less ideal for the stable core portion. [3] For fixed income core holdings, high-quality bonds (e.g., U.S. Treasuries, investment-grade corporates) are recommended as portfolio ballast, providing lower volatility and diversification benefits versus stocks. [4] Data source: Value Research [5] Data source: Morningstar [6] Data source: Aon Hewitt [7] Data source: CRISIL
This article is intended for informational purposes only and should not be considered financial advice. Please consult a financial advisor before making investment decisions.
- Incorporating tax savings into your personal-finance strategy, health insurance, and technology-based education-and-self-development can significantly contribute to your lifestyle and long-term financial well-being.
- Since core equity funds play a vital role in portfolio management, it's essential to consider investing in various core fund categories, such as debt funds, hybrid funds, and equity funds, in order to achieve a well-rounded approach to finance.
- Among the core equity categories, large-cap core funds exhibit the best combination of returns and stability, thereby making them an excellent choice for the primary portion of your investment portfolio.
- While large-cap core funds may have lower returns during specific periods, their steady returns and lower volatility make them a more appealing option than smaller and less diversified equity categories like mid and small-cap funds.
- The standout performers among the core equity categories, focused funds, provide higher returns at lower volatility, but might be better suited as satellite or complementary holdings due to their concentration and higher risk relative to larger and more diversified core equity funds.
