Which Equity Funds can be used for Long Term financial goal achievement ?

If we consider only Equity funds on broader concept, we have two variants – Large Cap & Small and Mid Cap.

Large Cap Funds are those vehicles whose majority investments are in Large Cap Companies that are financially stable and large market players. They have larger market share in the industry. Investors of such companies are rewarded more by Dividend Income than by Capital Gain. This means that such companies have explored the investment opportunities to their max and hence they distribute surplus cash available to their investors as dividend, unlike small and mid cap companies. Few Examples are Reliance Industries, TCS, HUL, HDFC, SBI, NTPC etc.

Small and Mid Cap Funds are those vehicles that mainly invest in small and mid cap companies. These are those companies that have either been recently listed on stock exchange or having been listed for the longer period have not yet explored all the available investment opportunities. And even if they have investment opportunities available, they do not have surplus funds for such investments. Also, as years pass on these Small and Mid Cap Companies become Large Cap Companies. Examples of Small and Mid Cap are Reliance Infra, Exide Industries, Avanti Feeds etc.

This is the basic difference between Large Cap & Small and Mid Cap Companies. Now how does the investment matters for investors. As Small Companies have lots of opportunities available for investment and growth, investors wealth is also likely to grow in the same proportion. But of course there is a huge risk involved, as Return is directly proportional to Risk. Suppose an investment of 10000 made in a small cap company, there are two future conditions. First, the company may grow enormously in size down the line in 10 to 15 years. This will increase investors wealth multi-fold time. Such stocks are often referred to as Multi-Bagger Stocks. Second situation that may arise is company may not survive and gradually may lead to shut down. In such case investors wealth will reduce to zero and capital will be lost.

But yes, this risk is mitigated or diversified if investment is made in Small and Mid Cap Funds. The reason is Funds invest not only in one or two stock, but in a basket 50 to 500 stock depending upon the nature of Funds. And if proper time is given for such investments to grow, the wealth will be multi-fold even if few companies in the Fund Portfolio shut down.

So the answer to the above question is that Long Term Financial Goal Achievements for time horizon of at least 15 years, Small and Mid Cap Funds are the best.

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Article by CA Bhaskar Abhishek