Best Mutual Funds to Invest in for Long term Investors

These 10 mutual funds have a stellar track record and have performed exceptionally well during both, bull and bear markets.

But why are we focusing on long term mutual funds only?

Well, simply because they are your best bet for wealth creation over the long term. Remember, athletes don't become champions overnight. The same is true for your mutual fund investments as well.

To build a winning portfolio, you must invest in the best long-term mutual funds. Long term investing is a buy-and-hold strategy, and the objective is not to make money from small price movements by speculating.

Before we dive deeper into what long term investing is, let us quickly take a look at the 10 best mutual funds to invest in 2021.

What is Long-Term Investing?

Long term investing is a strategy followed by some of the most successful equity investors, like Warren Buffett, Peter Lynch, and our very own Rakesh Jhunjhunwala.

In long term investing, the idea is to buy right and hold tight for the long term. However, the definition of long-term is different across investors.

- For aggressive investors, long term is more than three years.

- For conservative investors, long term could mean more than ten years.

Do you know what long term is for Warren Buffett?

33 years!

Yes...Berkshire Hathaway has been holding Coca Cola since 1988.

Generally, a time period of more than 10 years is considered to be long-term for financial planning.

But what is so special about long term investing? Let's find out...

The Advantages of Long-Term Investing

1. Higher Returns: You can yield high returns with a longer investment horizon, but patience is the key! And this is exactly where most retail investors fail.

   SBI Small Cap Fund is one of the best mutual funds to invest in 2021.

   However, you will be surprised to know that the fund generated -19.62% returns between 29th December 2017 and 31st December 2018. In the next year i.e. between 31st December 2018 and 31st December 2019, it generated +6.1% return only.

   Data as of 5th August 2021
   (Source: AceMF, PersonalFN Research)  

   A majority of the retail investors would sell this fund after such lacklustre performance. But that would be a big mistake. Because between 31st December 2019 and 31st December 2020, SBI Small Cap fund generated a stellar +33.62% return.

   So, one of the main advantages of long-term investing is that you generate much higher returns and the interim volatility is evened out -- only if you practice patience.

2. Risk Absorption: Long term investing is like playing a test match or running a marathon. The batsman, i.e. the fund manager, is not focused on making short-term bets. On the contrary, he is more interested in the fundamentals of stocks the fund is investing in. This is what fires up the conviction to stay invested in the stock even when it is going through a bad phase/year. Even if the fund manager goes wrong in making an assessment, they can correct the mistake or replace poor quality stocks. This way they minimise the negative impact on the portfolio in the short term and compensate this downside by gains over the long term.

3. Tax Benefit: When you constantly buy and sell mutual funds, there are tax implications. Similarly, even when the fund manager frequently buys or sells the underlying stocks in a mutual fund scheme, the capital gains are passed on to the unitholders.

   The truth is that a majority of the time, the gains you make by constantly switching funds is less than the taxes you pay. This is where long-term investing stands out. When you hold a fund for more than 12 months, you immediately save up on 5% extra tax.

   • - When you sell an equity fund before one year, you pay a flat 15% short-term capital gains tax (STCG).

   • - But if you sell an equity fund after one year, you pay 10% long-term capital gains tax (LTCG) only if your gains are above Rs 1 Lakh. If your long-term gains are below Rs 1 lakh, you don't pay any tax.

   Thus, by investing for the long-term, you can save anywhere between 5%-15% in taxes.

   "In this world, nothing can be said to be certain, except death and taxes." - Benjamin Franklin

4. Power of Compounding: The power of compounding is referred to as the eighth wonder of the world and is the second secret behind Warren Buffett's enormous wealth. The first is, of course, long term investing. But keep in mind, the power of compounding works only if you don't churn your portfolio very often.

   The graph below shows the gigantic difference between simple interest and the power of compounding.

   (The graph above is for illustration purposes only)  

   As you can observe in the graph above, in the beginning, the difference seems almost negligible. But over the long term, the difference keeps expanding. If you too want to create such enormous wealth, then you must invest in the best mutual funds for the long term.

5. Less Dependency on Star Fund Manager: One of the biggest benefits of investing in the best long-term mutual funds is that they have a well-established track record and stock selection processes. This process is tried, tested, and perfected over the years. So, the fund does not suffer even if the star fund manager leaves. The fund is not dependent on the whims and fancies of the fund manager.

Now before we discuss the list of the 10 best mutual funds to invest in for long term investments, let us first understand why we are insisting on equity mutual funds, and why not debt funds or gold.

​Equity Mutual Funds - The Catalyst for Long Term Wealth Creation

Equity as an asset class has proven to fare superiorly compared to most other asset classes over the long term. Even now, amid the COVID-19 pandemic, while returns on fixed deposits and bonds are at a multi-year low, equity markets are scaling new highs.

Gold works as a portfolio diversifier when other asset classes fail to perform when the world faces economic uncertainties. To give you an example, in the calendar year 2020, gold in INR terms clocked an absolute return of +28%, and in 2019, +24%.

Currently in 2021, due to a buoyant equity market, economic recovery in many parts of the world, and a strong U.S. dollar, the spotlight on gold has faded. But if inflation inches up, interest rates drop and uncertainty grips the world for whatever reason, gold would exhibit its sheen once again.

So, gold is not a consistent performer, but it usually depicts its trait of being a safe haven and commands a store of value. This is precisely why gold plays an important role in the central bank's reserve management. As an investor, you should strategically allocate around 10% to 15% of your entire investment portfolio to gold at all times with a long-term investment horizon.

Moving back to equities...

The below chart shows the long term returns of different types of mutual funds.

It doesn't take a genius to figure out why equity mutual funds are the best investment avenue for long term wealth creation.

Let us now take a closer look at the 10 best mutual funds to invest in for long term investments. To ensure 360-degree wealth creation, the list is spread across five sub-categories of equity mutual funds.

Best Mutual Funds to Invest in for Long Term Investments - Large-cap Category

1. Canara Robeco Bluechip Equity Fund: This is one of the best mutual funds to invest in for the long term. It has generated a CAGR of 16.63% in the last five years (as of 5th August 2021). This is superior to its benchmark S&P BSE 100-TRI's five-year CAGR of 14.76% (as of 5th August 2021).

   But Canara Robeco Bluechip Equity Fund's Assets under Management (AUM) is Rs 3,308 crores only (as of 5th August 2021). This is negligible compared to the AUM of Axis Bluechip Fund, i.e. Rs 28,247 crores (as of 5th August 2021). Nonetheless, the fund has managed to beat its peers across the short-term and long-term.

   The fund has generated an alpha of 7.5% over its benchmark (between 14th January 2020 and 23rd March 2020). It also has one of the best risk-reward ratios in the category. Its standard deviation is 19.13% (as on 5th August 2021). This is lower than the standard deviation of its benchmark (21.89%) and the category average (21.33%) as on 5th August 2021.

2. Mirae Asset Large Cap Fund: This best mutual fund to invest in for the long term is a market leader. It was launched in 2008 and has proved to be a steady performer. It has generated a CAGR of 15.83% in the last five years (as of 5th August 2021). It has delivered an alpha of 1.03% over its benchmark, the Nifty 100-TRI (between 23rd March 2020 to 22nd June 2021). The fund is a true large-cap and has 21.88% exposure to Banks and 15.97% to IT - Software as per the portfolio as of June 30, 2021. With a Standard Deviation of 21.29% (as on 5th August 2021), its volatility has been nearly in line with the benchmark. Moreover, the fund's Sharpe (0.53%) and Sortino Ratio (0.58%) as on 5th August 2021, is among the best in the category and ahead of its benchmark and category average.

Best Mutual Funds to Invest in for Long Term Investments - Large & Mid-cap Category

Large-cap mutual funds rarely invest in mid-cap stocks. But what if you want to have good exposure to aggressive mid-caps as well?

A large & mid-cap fund, as characterised by SEBI, is required to invest a minimum 35% investment in equity & equity related instruments of large-cap companies and simultaneously maintain a minimum of 35% allocation to mid-cap stocks (i.e. companies from 101st to 250th on full market capitalisation basis). The remaining portion is parked in debt & money market instruments.

This type of allocation enables investors to take advantage of the rally in mid-cap stocks as well as the stability from large-cap stocks.

The top two best mutual funds to invest in for long term investments in the Large & Mid-cap category are: 1) Mirae Asset Emerging Bluechip Fund, and 2) Canara Robeco Emerging Equities Fund.

1. Mirae Asset Emerging Bluechip Fund: This is one of the most compelling large & mid-cap funds. It has generated a one-year return of 67.96% (as of 5th August 2021). Its last five-year compounding annualised return has been a striking 21.45%!

   The fund has one of the best Sharpe ratios in the segment at 0.82% (as of 5th August 2021). It is one of the very few funds to perform across bull and bear cycles. The fund is known to hold worthy portfolio characteristics and is suitable if you are willing to take a slightly high risk with mid-caps and have an investment time horizon of at least 5 years.

2. Canara Robeco Emerging Equities Fund: This is a fairly balanced Large & Midcap fund with a successful track record of 16 years. Over the last one year, it has generated a return of 61.25% (as of 5th August 2021); and since its inception in March 2005, a compounded annualised return of 18.06% as of 5th August 2021.

   The fund pursues a growth strategy as visible by a price-to-equity ratio (P/E) of 35.37x (as per fund factsheet). The fund holds a well-diversified portfolio of over 50 stocks. It is mostly dominated by financial sector (28.27%) stocks. The fund currently invests 38.02% in large-caps, 33.30% in mid-caps and 6.56% in small-cap stocks as per the portfolio as of June 30, 2021.

Best Mutual Funds to Invest in for Long Term Investments - Flexi Cap Category

This is a fairly new category introduced by the Securities and Exchange Board of India (SEBI). Flexi cap funds do not have a fixed investment mandate to invest in the market capitalisation segment like the multi-cap funds do. On the contrary, flexi cap funds have the flexibility to invest across large, mid, and small-cap companies dynamically.

As expected, on the risk-return spectrum, flexi-cap funds are placed higher than large-cap funds and large & mid-cap funds. Hence, if you are willing to take high risk and want to enjoy capital appreciation across market capitalisation segments dynamically, you may consider a flexi-cap fund, provided you have an investment time horizon of at least 5 years.

The top two best mutual funds to invest in for long term investments from the flexi cap category are: 1) Parag Parikh Flexi Cap Fund and 2) UTI Flexi Cap Fund.

1. Parag Parikh Flexi Cap Fund: This flexi cap fund makes it to our best mutual funds list to invest in for long term investments because of its value investing style approach - indicated by the portfolio P/E of 26.12x - and blend of domestic and international equities. It invests one-third of its corpus in overseas equities, which include companies such as Alphabet, Amazon, Facebook, Microsoft, etc. The fund has generated an impressive return of 55.17% in the last one year (as of 5th August 2021).

   Despite the high volatility witnessed in the equity markets over the last few years, Parag Parikh Flexi Cap Fund has ranked among the list of top-quartile performers. The fund has shown a stark outperformance over its benchmark and most of its peers. Moreover, the fund registered consistency in terms of outperformance across bull and bear market phases.

2. UTI Flexi Cap Fund: UTI Equity Fund, one of the oldest schemes in the Indian mutual fund industry (launched in 1992), was renamed as UTI Flexi Cap Fund (UFCF) in line with the change in the fund's categorisation to the flexi cap category. It is one of the best mutual funds to invest in for long term investments due to its stellar track record across bull and bear markets.

   It has generated a return of 66.34% in the last one year (as of 5th August 2021). The fund has delivered an alpha of 2.98% (between 23rd March 2020 to 31st May 2021) against its benchmark index, Nifty 500 TRI. Moreover, UTI Flexi Cap Fund has demonstrated its ability to limit the downside during the recent market crash and participate in the recovery phase.

   The fund currently invests 42.10% in large-cap stocks, 33.25% in mid-caps, and 9.43% in small-cap as per the portfolio as of June 30, 2021. Speaking of sector exposure, it has significant holdings in financials, information technology, and the healthcare sector.

If you are a highly aggressive investor, below is the list of best mutual funds to invest in for long term investments in the mid-cap and small-cap categories.

Best Mutual Funds to Invest in for Long Term Investments - Mid-cap Category

As per regulatory guidelines, mid-cap funds are mandated to invest in stocks ranging from 101st to 250th based on market capitalisation. These stocks are below the large-caps and belong to mid-sized growing companies. Hence, the investment risk is high. That said, mid-cap funds offer you the potential to generate significant wealth.

During bull phases, mid-cap funds tend to outperform pure large-caps and even large & mid-cap funds by a significant margin. Conversely, in the bear periods, they also tend to plunge more.

In the recent bull phase, the mid-caps have outperformed large-caps by a noticeable margin. Over the long term, mid-cap funds hold the potential to accelerate returns.

The top two best midcap mutual funds to invest in for long term investments are: 1) Axis Midcap Fund and 2) Kotak Emerging Equity Fund

1. Axis Midcap Fund: This is one of the best midcap funds to invest in for long term investments. Axis Midcap Fund focuses on investing in high-quality growth-oriented midcap stocks and that has rewarded its investors handsomely over the long term. The fund pursues a growth strategy and follows a bottom-up investment approach.

   It has gradually increased its holdings to around 60 stocks from 35-50 stocks earlier, probably keeping in mind its growing asset size. Axis Midcap Fund's portfolio as of June 30, 2021, comprises 27.68% in large-cap stocks, 57.84% in mid-cap stocks, and 11.93% in small-cap stocks. As regards the sector composition, the fund invests heavily in the financial (17.87%) and IT (11.91%) sectors.

   Axis Midcap Fund has generated a return of 62.33% in the last one year (as of 5th August 2021). It is one of the best mutual funds to invest in for long term investments as displayed by its compounded annualised return of 19.47% since inception (as of 5th August 2021).

2. Kotak Emerging Equity Fund: This fund has evolved strongly in the last few years to figure among the top performers in the category. The fund was launched in 2007 and has an AUM of Rs 14,133 crore (as of 5th August 2021).

   Kotak Emerging Equity Fund has been through multiple market phases and cycles and has done well to ride the market highs and lows during most of these phases.

   The fund invests in 66 stocks with exposure of 5.56% to large-cap stocks, 62.36% to mid-cap stocks, and 24.83% to small-cap stocks as per the portfolio as of June 30, 2021. It holds a well-diversified portfolio across sectors such as healthcare, construction, engineering, financials, and chemicals, among many others.

   The fund follows a buy and hold investment strategy to derive the full potential of the stocks. This helps it benefit from long term growth in midcap stocks. The fund has generated a one-year return of 79.38% (as of 5th August 2021). It has clocked a compounded annualised return of 14.28% since its inception (as of 5th August 2021). This stellar return makes it one of the best funds to invest in for the long term.

Finally, we come to the riskiest category, i.e. small-cap funds.

Best Mutual Funds to invest in for Long Term Investments- Small-cap Category

Small-cap mutual funds invest in stocks of 251st onward companies as per market capitalisation. Small-cap stocks are placed below the mid-cap companies and are smaller in size. Besides, small-cap stocks usually have low trading volumes compared to large and mid-cap stocks. Thus, the investment risk associated with small-caps is also greater.

Given these characteristics, a small-cap fund could show a tendency of going from thrilling highs to dangerous lows. Hence, a small-cap fund may be considered only if you are ready to accept very high volatility or risk.

The top two best small-cap mutual funds to invest in for long term investment are: 1) SBI Small Cap Fund, and 2) Kotak Small Cap Fund.

1. SBI Small Cap Fund: Launched in September 2009, this small-cap mutual fund currently manages a corpus of over Rs 9,000 crore. This fund follows a combination of growth and value investing along with a bottom-up investment approach to select high-growth stocks for investments.

   The fund holds a diversified portfolio of 50 stocks split into 73.96% in small-cap stocks, 9.07% in midcap stocks, and 13.62% in others according to the portfolio as of 30th June, 2021. SBI Small Cap Fund does not hold any exposure to large-cap stocks. Hence, the fund carries very high risk. The fund is diversified across sectors such as, chemicals, consumer durables, cement, construction, engineering, consumer non-durables, etc.

   SBI Small Cap Fund has compensated its investors handsomely. It has generated a return of 84.52% in the last one year (as of 5th August 2021) and its annualised return since inception is a remarkable 20.89% (as of 5th August 2021).

2. Kotak Small Cap Fund: Incepted in February 2005, this scheme is another worthy small-cap fund managing assets over Rs 4,500 crore. It follows a blend style of investing with a focus on high-growth stocks. Normally, it invests in companies that have proven products/services, above-average earnings growth and has the potential to sustain such growth, which appear undervalued compared to their growth prospects, and/or companies that are in the early and more dynamic stage of the life cycle but are no more considered new or emerging.

   Currently, Kotak Small Cap Fund holds 67 stocks, where it holds 67.73% in small-cap stocks, 12.91% in mid-caps, and 1.76% in large-caps for stability. The sector composition of the fund is skewed towards consumer goods (22.59%), industrial manufacturing (14.82%), chemicals (8.68%), construction (6.67%), and information technology (6.63%) as per the portfolio as of 30th June, 2021.

   The one-year return generated by Kotak Small Cap Fund is phenomenal 116.88% (as of 5th August 2021) and since its inception, 17.93% compounded annualised. Kotak Small Cap Fund is one of the best mutual funds to invest in for long term investment.

Conclusion:

Long term investing is an art that needs decades to be perfected with patience and perseverance. You can invest your hard-earned money in a fund only if you are absolutely certain that it is indeed the best mutual fund for long term investment.

How can you know this for sure? By conducting qualitative and quantitative research.

You need to study a fund's portfolio in detail. Ask these questions:

• ✓ Is the fund manager diversifying the corpus enough?

• ✓ Is your fund claiming to be a value fund but its P/E is through the roof?

• ✓ Is the fund able to perform across bull and bear markets?

And a gazillion more questions...

Sounds like a daunting task?

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FAQs on Best Mutual Funds to Invest in for Long Term

1. What is long term investing?

   Long term investing is a buy right and hold tight strategy. Here your goal is long-term capital appreciation and not short-term speculation. In financial planning, a period of more than 10 years is considered long term.

2. What are the advantages of long term investing?

   Long term investing is one of the best ways to create long-term wealth. It is practised by investing legends like Warren Buffett, Charlie Munger, Rakesh Jhunjhunwala, and many more! The five main advantages of long-term investing are:

   • ✓ The benefit of the power of compounding

   • ✓ Possibility of superior returns

   • ✓ Risk minimisation

   • ✓ Sole reliance on fundamentals while investing

   • ✓ Tax benefit

3. What category of a mutual fund is best for long term investment?

   There are more than 29 different types of mutual funds in India. But for long term wealth creation, equity mutual funds are appropriate and potent.

   So, if you are an aggressive investor, then consider investing in the appropriate sub-categories of equity-oriented mutual funds.

4. Which are the best large-cap mutual funds to invest in for the long term?

   Large-cap funds are suitable if you do not wish to take very high risk and have an investment time horizon of 3 to 5 years. The best large-cap mutual funds to invest in 2021 are Canara Robeco Bluechip Equity Fund and Mirae Asset Large Cap Fund.

5. Which are the best midcap mutual funds to invest in for the long term?

   Midcap mutual funds are suitable for very aggressive investors with a long investment horizon of 5 to 7 years and having the stomach of very high risk. Axis Midcap Fund and Kotak Emerging Equities Fund are the two best midcap funds to invest in for the long term.

6. Which are the best small-cap mutual funds to invest in for the long term?

   Small-cap mutual funds have outperformed all other types of mutual funds in the last one year. But you should be careful while investing in small-cap funds as they invest in lesser-known companies which are not financially stable yet. The two best small-cap mutual funds for 2021 are SBI Small Cap Fund and Kotak Small Cap Fund if you are a very-high risk taker and have an investment time horizon of 10 years or more.

7. How are long term mutual funds taxed?

   In the case of equity funds, a holding period of more than 12 months is long-term. When you sell your mutual funds after 12 months at a profit, you are taxed at a flat 10% on capital gains exceeding Rs 1 Lakh.

8. SIP or a Lump sum - Which is better in long-term investing?

   Both lump sum investing and SIP are necessary to invest for the long term. SIPs help you invest regularly without having to worry about timing the market, and the inherent rupee-cost averaging feature enables mitigating the risk involved. The longer the time period, the rupee-cost averaging works better in your favour (particularly when markets descend) and you also benefit from the power of compounding. Remember, there is no such thing as best SIPs; what you need is the best mutual fund schemes to SIP into for the long term.

Happy Investing!

Warm Regards
PersonalFN Content & Research Team

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