The analysis presented below is based on the performance and current composition of 3 market leading funds as of 14th November 2014 in their respective category.

There are thousands of funds to choose from and within these funds there are the ones with high concentration on equities or debt. There are the gold funds, infrastructure funds or the oil & gas funds. Emerging company funds or funds styled as regular income (dividend) or capital growth fund.

Bottom line – A mutual fund could invest the money collected from the investors in any money market instrument. You must select a fund very carefully based on your time horizon and investment objective.

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Why Should You look at Equity Mutual Funds

Whether you are an active investor and like to buy and sell stocks on your own account or you are someone who likes to buy mutual funds and do not actively follow the markets, it is important to look at mutual funds just to get a sense of the broader markets.

I look at mutual fund schemes as a method of investigation into what big fund houses are buying and selling. Not necessarily because I want to imitate their folios but often a good way to discover contrarian investment ideas as most fund houses imitate each other. For this reason they become very sector specific. The result is that while in the short term some sectors tend to outperform the others in the longer term those who manage to buy beaten down sectors tend to do very well.

I will give you an example of the past and a prediction on the future. 3-4 years back most funds were bullish on FMCG and Pharmaceuticals. Over the last 3-4 years, these sectors indeed outperformed the broader markets by miles. Currently if you look at some of the top performing funds, they will show a clear bias towards financial services and IT stocks. The point I try to make is that if you buy deeply undervalued companies with a bottom up approach, then you need not follow the ‘flavor of the month’ sector. With time you will make a very good return.

Top Equity Mutual Funds – Composition Analysis

Disclaimer: I do not have any of these (or any other) mutual funds in my portfolio. While I regularly follow fund action i.e. buying and selling activity in various funds, I do not invest in mutual funds. It is safe to assume that at any given point my portfolio will consist of one or more stocks forming part of these schemes”.

(Click on image to enlarge – past performance not indicative of future returns)

If you look at the top performing funds (for 12 month period up to November 2014) above you will notice a high concentration in financial services. This is not surprising given the fact that the economy is just coming out of a long drawn slowdown. Typically, banking sector is the sector to revive when the economy starts doing well. This is where liquidity starts. That said it is also the first sector to take the hit when there is a slowdown. Typically, recessions are always marked by bank failures as more and more companies find it difficult to pay back their debts.

Best Equity Mutual Funds in Current Market Scenario

For me personally, undervalued stocks which pay a high rate of dividend are the best buy. I like to buy stocks at a deeply discounted price and hold on to them forever. As the price appreciates, the company pays more and more dividend. In a few years, the amount of dividend becomes higher than the initial investment cost. Before you read further, I highly recommend that you – Read here for my best stock purchase decision.

Where markets are currently, I would highly recommend all mid and small cap equity mutual funds along with buying some individual high dividend paying stocks. If you wish to take one advice – stay away from sector specific funds like – infra fund, gold fund, oil & gas fund etc. as also funds styled as – ‘tax saver’. In my experience and based on some empirical evidence, these funds have always underperformed other funds over a longer time horizon. If you wish to discuss any fund, write in to me at – or post your question under this post.

Note: Sectoral composition & stocks in each fund are as on 31st October 2014.

FUND                                            (In % terms) EQUITY CASH DEBT
UTI Equity Fund (G) 99.18 0.41 0.41
SBI Blue-chip Fund (G) 92.31 7.69
Franklin India Smaller Companies Fund 95.57 0.23 4.76

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