Which fund should you invest in during volatility?
Many mutual fund investors may not be aware of how important it is to assess or adjust your strategy during periods of increased market volatility.
Recently, an investors got a message from his brokerage saying “The market is likely to remain volatile across a wider range until there is clarity on the geopolitical front.”
After reading this, it was clear that he was aware that, given the bullish and volatile state of the market, it was time to rebalance the mutual fund portfolio using a new approach that would lessen the volatility of his mutual fund holdings.
Many mutual fund investors may not be aware of how important it is to assess or adjust your strategy during periods of increased market volatility. This can determine your short-term view and help you avoid certain losses.
Mutual funds are vulnerable to market risks and volatility in the same way that equities are. Let’s examine what investors should do in the event of market volatility:
What should the investor’s strategy be in highly volatile markets?
Market volatility has been gradually increasing due to nervousness on valuations and global geopolitical developments. Market experts say that from a domestic market point of view, there has been increased volatility in midcaps and small-caps, while large caps have seen a lower increase.
“Foreign Portfolio Investors (FPI) selling has depressed large cap valuations, while high retail buying has increased those of midcaps and small caps. We see the lower valuation of large caps as an opportunity for investors to invest in India’s leading companies. Investors should consider large caps and flexicaps as a strategy to invest in the current market environment,” said Satish Ramanathan, CIO-Equity, JM Financial Mutual Fund.
What are flexi-cap funds and large-cap funds?
A flexi-cap mutual fund falls under the equity mutual fund category. As per Sebi guidelines, the fund manager must invest 65% of its total assets in different market capitalizations, including large, mid, and small-cap stocks.
Fund managers have the complete flexibility to decide how much funds should be allocated in which market capitalization.
For instance, in a bullish market scenario, fund managers can change the allocation from one market cap to another, which can help generate better market returns by taking advantage of the market opportunities. Flexi-cap funds are appropriate for investors with a medium to high-risk tolerance and a minimal investment horizon of five years.
When it comes to large-cap funds, the Securities and Exchange Board of India (SEBI) states that large-cap funds are mutual fund schemes that invest at least 80% of their assets in the stocks of large-cap companies or equity-related securities.
These stocks of large-cap firms are those whose market capitalisation places them among the top 100 companies. While large-cap companies are larger than small- or mid-cap companies, these funds also have a lower risk profile, and their investment horizon is longer for over 5 years.
Flexi-cap and Large-cap funds, both equity mutual funds, fall under the equity category of mutual funds; hence, they are taxed like equity mutual funds. If you redeem before one year, returns are subject to a 15% tax. After a year, you must pay a 10% long-term capital gain tax on returns of Rs. 1 lakh or more in a fiscal year.
Returns on Large-cap funds and Flexi-cap funds
As per the Ace mutual fund, the Flexi-cap Fund has given an average return of 17%,19%, and 15% over 1,3 and 5 years, respectively, as of 20th November 2023.
As per the Ace mutual fund, the Large-cap fund has given an average return of 12%,16%, and 13% over 1,3 and 5 years, respectively, as of 20th November 2023.
Large Cap Fund Returns (%)
| Scheme Name | 1 Yr | 3 Yrs | 5 Yrs |
| Nippon India Large Cap Fund | 19.0 | 24.6 | 15.1 |
| HDFC Top 100 Fund | 17.0 | 22.1 | 14.1 |
| JM Large Cap Fund | 15.5 | 15.8 | 12.9 |
| ICICI Pru Bluechip Fund | 15.4 | 20.2 | 15.1 |
| DSP Top 100 Equity Fund | 15.1 | 14.9 | 12.2 |
| Edelweiss Large Cap Fund | 14.1 | 16.9 | 14.5 |
| Invesco India Large Cap Fund | 13.4 | 16.8 | 13.9 |
| HSBC Large Cap Fund | 13.2 | 15.2 | 13.5 |
| Baroda BNP Paribas Large Cap Fund | 12.3 | 16.1 | 15.2 |
| SBI Bluechip Fund | 12.0 | 17.3 | 14.4 |
Source: Ace Mutual Fund; Returns as on November 20, 2023; Less than 1 year returns are absolute and above one year CAGR
Flexi Cap Fund Returns (%)
| Scheme Name | 1 Yr | 3 Yrs | 5 Yrs |
| JM Flexi Cap Fund | 28.2 | 26.0 | 19.4 |
| Parag Parikh Flexi Cap Fund | 25.5 | 22.6 | 21.8 |
| HSBC Flexi Cap Fund | 20.7 | 18.9 | 14.0 |
| DSP Flexi Cap Fund | 20.4 | 18.5 | 17.1 |
| Motilal Oswal Flexi Cap Fund | 19.0 | 13.3 | 10.8 |
| HDFC Flexi Cap Fund | 18.4 | 28.4 | 17.2 |
| Union Flexi Cap Fund | 18.0 | 20.4 | 17.2 |
| LIC MF Flexi Cap Fund | 18.0 | 14.6 | 12.5 |
| Tata Flexi Cap Fund | 17.9 | 16.1 | 13.4 |
| Franklin India Flexi Cap Fund | 17.8 | 23.5 | 16.5 |
Source: Ace Mutual Fund; Returns as on November 20, 2023; Less than 1 year returns are absolute and above one year CAGR
Conclusion
Investors should look for a large-cap fund that has consistently outperformed its peers and beat its benchmark index.
Over the long-term, flexi-cap mutual funds profit from the power of compounding. The longer the time horizon of an investment, the greater the likelihood of significant returns.
(Mutual Fund investments are subject to market risks, read all scheme-related documents carefully, or you can get the help of a financial advisor to understand the risk associated with the funds.)