The decade gone by has influened the fate of equity mutual funds in India. Equipped with market volatility to never-seen-before economic liberalization, the funds sailed through choppy waters while dishing out yields that dwarf traditional investments. Wealth creation over the long term was a catchword, and investors made large stakes in equity-oriented schemes.
Some schemes have outperformed others consistently, and learning from such high achievers provides us with important lessons in the strategies, structures, and sectors that generated wealth in the last decade.
Equity mutual funds evolved from specialty financial products to mass investment. Growth in the investor base, systematic campaigns of financial awareness, and technology reach catalyzed participation. Systematic investment plans or SIPs became the most convenient mode of investing for long-term investors, providing disciplined access to equities. During the decade, the equity segment not just survived international shocks but also excelled in India's structural reforms, robust corporate performances, and increasing retail participation.
Large-cap equity funds were the backbone of equity mutual fund portfolios. Large-cap funds invested in large-cap companies with sound balance sheets, which provided stability even in times of market volatility. The decade witnessed funds from this category constantly registering double-digit compounded annual growth rates. Ongoing exposure to banks, IT, and consumer goods companies ensured smooth performance. Large-cap funds were the best choice for investors who wanted a mix of safety and growth in turbulent markets.
Mid-cap funds found the middle path between the stability of large-cap and the vibrancy of small-cap. They enjoyed the growth opportunities in younger companies without losing much of the volatility risks. During the decade, the majority of mid-cap schemes reported affluent returns, especially during economic booms when companies of medium size became scorchingly hot. Mid-cap fund managers who emphasized solid business models and high-growth sectors made mid-cap funds produce results that more often than not outperformed the large-cap counterparts but with greater volatility.
Small-cap funds yielded some of the best returns in the equity universe but at the cost of greater risks. Small-cap plans invested in young or niche players with the potential to grow into giants. The decade witnessed the revolutionary force of small-cap investment, where some plans yielded stellar returns for long-term investors. The sheer risk-taking nature of this space made it fit for only those investors with very high risk appetite and long time horizons.
Theme and industry equity funds were popular in the decade. Technology sector funds tracked the digital revolution and outsourcing waves worldwide. Indian credit and financial inclusion growth story produced banking and financial services funds. Consumption, infrastructure, or ESG-themed funds also earned good returns in selected cycles. Though these funds were focused, careful allocation and supportive macroeconomic conditions allowed many of them to be leaders.
Ten years of equity fund performance reaffirmed several lessons. Industry and category diversification continued to be the key to long-term returns. Consistent investment during bear markets went a long way toward wealth creation over the long term through cost averaging. Fund management stability was crucial, and schemes handled by stable hands consistently outperformed those with extremely high human resource turnover. Typically, long-term investors who were disciplined during the period in between made a handsome return irrespective of vagaries in the interim.
Experts are of the view that Indian equities' structural story of growth is intact. Domestic consumption, digitalization, and reforms triggered by the government will drive corporate profits. The rate of returns, however, could slow down versus the last decade with high valuations and external challenges. Equity mutual funds continue to be a powerful wealth creator, if investors balance fund choice with risk tolerance and investment horizon. Professional fund management and focused investment continue to have the keys to sustainable performance.
The past decade reaffirmed the position of equity mutual funds as a pillar of long-term wealth creation in India. From stability of large-cap to dynamism of small-cap, funds across categories delivered strong returns on the back of judicious fund management and favorable macroeconomic conditions. Sector schemes gave more risk-takers in terms of investors an opportunity to invest. As the market continues to mature, equity mutual funds will remain at the centre of India's investment universe, allowing investors to benefit from the country's growth story.