Which is the best mutual fund category to save for your retirement?


Does it really make a big difference if you invest in a largecap, a midcap, a multicap or a smallcap fund, when you are investing for a long-term financial goal like retirement? The predictable response would be to believe that the scheme with the highest risk would add extra sheen to the corpus. We decided to look at the 10-year rolling return data of largecap mutual funds, midcap funds, smallcap and multicap schemes to find a honest answer to the query.

The results were surprising. If we go by the data, there is not much difference in the average returns across the equity fund categories. The 10-year rolling returns, rolled on a daily basis over a period of 20 years from 1998 to 2018 for largecap category is 14.57 per cent, and 14.85 per cent for smallcap category. Hardly any difference in the returns.

What is a rolling return, why did we use it and why should we trust the probability of getting similar returns in future? To get details, read this: Is ‘rolling return’ the best way to measure performance of mutual funds?

Usually, we relate largecap funds with a conservative risk appetite and smallcap funds with aggressive risk profile. It also changes the risk and reward ratio. However, going by the data, we can say that actually an investor would not need to take that extra risk of smallcap if s/he is investing for his/her retirement or any goal which is 10 -15 or 20 years away.

The returns for midcap category stood at 16.56 per cent and that for a multicap was 15.79 per cent, 1-2 per cent higher than the returns generated by large- and small-cap funds.

Looking merely at the returns of multicap and midcap funds, we can say that it does not make sense to take the extra risk in a midcap when multicap funds can give similar returns.

No doubt, Harshad Patwardhan, CIO, Edelweiss Mutual Fund, believes that a multicap fund is the solution to asset allocation across markets caps for investors. “A multicap fund is an all-seasons fund with the privilege to diversify across marketcaps unlike other equity categories,” said Patwardhan at ET Wealth Investment Workshop held last week in Kolkata.

But, as an investor, we do not invest in a category, we invest in a scheme, what if that scheme turns out to be the worst performer in the category? See table below for average maximum and minimum returns for any scheme in the category.

Here comes the role of an advisor. If you cannot find out a good scheme in the category, you must take help of a mutual fund advisor. Also, a good scheme at a time might not continue to be good forever. If you are a DIY investor, you need to be able to figure when you need to switch to other scheme. Otherwise, your advisor can do it for you.
Experts believe that a good scheme, a disciplined approach, and a long term view on equity will make sure that you do not end with losses.

“Do not do SIP (in equities) if you cannot do it for a minimum of seven continuous years. Historical data shows there are chances of your SIPs showing negative return even at six years. Invest in equities with a long term view to attain the most out of it,” said Brijesh Dalmia at ET Wealth Investment Workshop held last week in Kolkata.

Category 10-year Rolling Returns* (%) Maximum Returns (%) Minimum Returns (%)
Largecap Funds 14.57 23.22 8.75
Midcap Funds 16.56 25.45 10.61
Smallcap Funds 14.85 19.81 10.28
Multicap Funds 15.79 25.45 10.61

*10-year rolling CAGR returns are rolled on a daily basis over a period of 20 years from Dec 1998 to Dec 2018
Source: Ace MF



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