One of the most frequent question on investors’ minds is: Which are the best mutual funds to invest in for the long-term?
For investors who can be more hands-on with their portfolio, which only means making the odd change every 12-18 months or so, a combination of active equity mutual funds can potentially outperform the index. Hence, the Capitalmind Equity Mutual Fund Portfolio.
Capitalmind Mutual Fund Portfolio comprises three active funds that allow us adequate diversification across strategies, categories, and risk-return profiles.
Launched in August 2022, here is the performance of the portfolio after going LIVE.
How we shortlisted funds
Look beyond the returns: Funds should have a certain amount of operational history (track record) and longevity to understand how they have been through various market cycles.
Performance within the category: Evaluate the outperformance and underperformance of a fund on a 1-year rolling return basis
Volatility: The annualized standard deviation of daily returns normalized for the fund’s median 1-year performance. So, lower volatility but low return fund gets penalized compared to a higher return fund of similar volatility.
AUM Health: AUM of the fund should at least cross a threshold that allows the fund to deploy adequate resources (research team, tools, etc) that help in generating good performance.
Beat the index: If the fund is not able to constantly beat the index it is tracking, it’s not even worth considering it as an investment.
Performance across different phases (backtest)
1-year rolling returns give an idea of how the strategy has performed over different market cycles. Yes, of course, it will outperform the index most of the time because we have picked the best funds, and survivorship bias is a real thing. However, it’s still necessary aspect to check out how the portfolio weathered different market conditions before committing to a portfolio.
Volatility is as much a part of the deal as returns. Ask yourselves this – How likely are you to hold on to a fund that falls 50% from its peak? You’re far more like to back yourselves and stay invested in a fund that does not fall as much. A lower volatile fund, in some cases, may mean settling for lower returns but it will keep you invested in the long run which is better than ducking out of your investment plan.
Two things to consider before investing
This is an all-equity portfolio, so it assumes that your asset allocation in the form of debt and other asset classes is taken care of. The portfolio is suitable for investment horizons of 5 years or more. That doesn’t mean the funds in the portfolio won’t change, just that equities, especially mid and small caps, can see periods of negative to no returns for periods of time, sometimes extending to 3 years or more, so it is unsuited for sub-five-year horizons.
This is an aggressive mutual fund portfolio with 50% allocation to mid and small-cap funds plus the remaining in one flexicap fund. Note your effective allocation to mid and small caps will likely be lower than 50% because most mid and smallcap funds typically invest the mandated 65% minimum to those market caps and the remaining in large caps.
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