Best Mutual Funds to Invest In 2018? Read This First!



Mutual funds are the best option for retail investors seeking to grow their wealth. Given the hype about mutual funds through an investor education campaign – ‘Mutual Funds Sahi Hain’ - led by the Association of Mutual Funds in India (AMFI), many investors are gaining interest in the financial product.

While mutual funds may be a good investment avenue, investors face the dilemma of which mutual funds to choose. There are 36 different categories of mutual funds, across 40-odd fund houses. Many of the largest fund houses have a scheme for every category. Thus, as on date, there are as many as 857 open-ended mutual fund schemes.

An investor like you would at most require just 10-12 mutual fund schemes in their portfolio, across equity mutual funds, debt mutual funds, hybrid mutual funds, and ELSS funds. Imagine the tough task that is required to eliminate 98.8% of mutual funds in existence to pick the remaining 1.17%— the best mutual funds.

To pick the best mutual funds and to eliminate schemes that are not worth your investment requires a certain level of knowledge and expertise.

Many investors end up taking short-cuts by investing in the top performing mutual funds of the past 3-year or 5-year periods. Some may also fall for five-star rated mutual funds. While these may be good starting points, they may not necessary lead to the best mutual funds or rather the right mutual funds for your portfolio.

Let’s run a simple back test. We will list the top 20 equity mutual funds by their 5-year performance as on May 31, 2013. We will then compare their ranking based on their 5-year returns as on May 31, 2018.

This will tell us whether the top mutual funds of a particular period were able to keep up their performance in the next long term period.

Below are the top 20 mutual funds from the equity category based on their 5-year returns ended May 31, 2013.

The table also highlights the return of the schemes in the subsequent 5-year period and how they ranked amongst their peers.

Have a look:

Top Mutual Funds? Scheme Name 31/May/08 To 31/May/13 (%) 31/May/13 To 31/May/18 (%) Percentile Rank IDFC Sterling Value Fund 15.73 22.30 72% ICICI Pru Value Discovery Fund 14.55 21.47 68% HDFC Mid-Cap Opportunities Fund 13.18 26.09 88% ICICI Pru Bluechip Fund 13.08 16.79 37% Reliance Multi Cap Fund 13.06 17.06 41% IDFC Multi Cap Fund 13.04 19.76 62% Aditya Birla SL Dividend Yield Fund 12.77 14.30 15% Quantum Long Term Equity Value Fund 12.10 16.00 30% UTI Value Opp Fund 12.05 13.55 10% Invesco India Multicap Fund 11.75 24.02 82% Aditya Birla SL Pure Value Fund 11.75 28.35 93% BNP Paribas Multi Cap Fund 11.72 18.54 51% Mirae Asset India Equity Fund 11.43 20.71 66% SBI Focused Equity Fund 11.31 19.38 59% Canara Rob Equity Diver Fund 10.67 15.22 25% HDFC Equity Fund 10.66 16.80 38% UTI Dividend Yield Fund 10.08 13.73 10% HDFC Top 100 Fund 9.80 15.20 24% DSPBR Midcap Fund 9.80 25.79 87% UTI Equity Fund 9.75 17.05 40% Returns are compounded annualised. Data as on May 31, 2018

(Source: ACE MF, PersonalFN Research)



As seen in the table above, just a few limited schemes were able to keep up their performance over the next five years. About half of the top 20 schemes by their 5-year returns as on May 31, 2013, ended up in the lower half of the list of schemes based on their latest 5-year performance.

The percentile rank in the last column represents the percentage of schemes a specific fund has outperformed. Let’s assume there are 100 schemes on the list, and if IDFC Sterling Value Fund has a percentile rank of 72%, it means it has outperformed as many as 71 schemes, but as many as 28 schemes have done better. Thus, higher the Percentile Rank, the better.

Just about four schemes such as, HDFC Mid-Cap Opportunities Fund, Invesco India Multicap Fund, Aditya Birla SL Pure Value Fund, and DSP BlackRock Midcap Fund were able to maintain their percentile rank above 80%.

Yes, these schemes were able to keep up their high-ranking performance in the next period as well. But are these top funds fit for your portfolio?

Given the vast number of schemes, top mutual funds purely based on returns will differ from one period to the next. A scheme may have done well because certain factors may have favoured the stocks in the portfolio.

For example, PSU banks are not the first choice of fund managers. However, in October 2017, when the government announced a recapitalisation plan, shares of PSU banks shot up 30% in a single day. Mutual funds investing in such stocks gained. However, as we know it, this euphoria lasted only a few months. PSU banks are now back to where they were 8-9 months ago.

Therefore, if you were searching for funds at the end of October or beginning November 2017, the performance of the schemes investing in such stocks would have shown a better performance. But it's not necessary that these were better schemes based on different risk-return parameters.

Thus, when it comes to seeking the best mutual fund, you need to focus on multiple aspects.

Therefore, instead of chasing performance or the scheme with the best returns over a period or multiple periods, you need to select the right mutual funds.

Because the best mutual fund today, may not be the best mutual fund tomorrow or the best mutual fund for a SIP.

You could however pick a top quality fund that has not only performed consistently in the past, but which has delivered strong returns via a SIP as well.

How to pick the best mutual funds to invest in 2018?



When picking mutual fund schemes, you need to analyse the risk-return parameters vis-a-vis other schemes and the quality of fund management. Not all mutual funds have the wherewithal to perform consistently under varied market conditions.

You need to analyse the historical data of returns from mutual funds across multiple periods and market cycles. Shortlist funds that have consistently outraced the market and their peers. Select the one that matches your risk profile and suitably meets your investment goals.

Watch this video on how to select winning mutual funds in a few simple steps:



Well, no one has a magic crystal ball that can foretell which mutual fund schemes will top the list over the next decade. However, through years of experience, one can define a process that can be used to shortlist potentially the best mutual fund schemes for the future.

There are various aspects within a mutual fund scheme, which are vital for investors to analyse before investing. These are:

Performance: The past performance of a fund is important. But, remember that past performance is not everything, as it may or may not be sustained in future and therefore should not be used as a basis for comparison with other investments. It just indicates the fund’s ability to clock returns across market conditions. And, if the fund has a well-established track record, the likelihood of it performing well in the future is higher than a fund which has not performed well. Under the performance criteria, we must make a note of the following:

Comparison: A fund’s performance in isolation does not indicate anything. Hence, it becomes crucial to compare the fund with its benchmark index and its peers, so as to deduce a meaningful inference. Again, one must be careful while selecting the peers for comparison. For instance, it does not make sense comparing the performance of a mid-cap fund to that of a large-cap. Remember: Don’t compare apples with oranges. Time period: It’s very important that investors have a long-term horizon (of at least 3-5 years), if they wish to invest in equity-oriented funds. So, it becomes important for them to evaluate the long-term performance of the funds. However, this does not imply that the short-term performance should be ignored. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally, it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts higher returns than its benchmark and peers during the downturn. Returns: Returns are obviously one of the important parameters that one must look at while evaluating a fund. But remember, although it is one of the most important, it is not the only parameter. Many investors simply invest in a fund because it has given higher returns. In our opinion, such an approach for making investments is incomplete. In addition to the returns, one also needs to look at the risk parameters, which explain how much risk the fund has undertaken to clock higher returns. Risk: To put it simply, risk is the probability of a loss. In non-financial terms, risk is referred to as the loss of life or property. In finance, though risk has a more complex definition, it can be easily termed as the loss of capital. No one likes losing money, and that is the ultimate financial risk. Another way to look at risk is in the form of volatility. Stock markets tend to fluctuate more wildly than debt markets, hence, the risk is higher. However, riskier assets tend to deliver higher returns over the long term. Investors often look to capitalise on the volatility of the market to generate higher returns. Risk is normally measured by Standard Deviation (SD) and signifies the degree of risk the fund has exposed its investors to. From an investor’s perspective, evaluating a fund on risk parameters is important because it will help to check whether the fund’s volatility is in line with their risk profile or not. For example, if two funds have delivered similar returns, then a prudent investor will invest in the fund that has achieved the same at a lower risk i.e. the fund that has a lower SD. Risk-adjusted return: As a practice, most analysts use Sharpe Ratio to measure risk-adjusted returns. It signifies how much return a fund has delivered vis-à-vis the risk taken. Higher the Sharpe Ratio better is the fund’s performance. As investors, it is important to know the same because they should choose a fund that has delivered higher risk-adjusted returns. In fact, this ratio tells us whether the high returns of a fund are attributed to good investment decisions, or to higher risk. Portfolio Concentration: Funds that have a high concentration in particular stocks or sectors tend to be very risky and volatile. Hence, investors should invest in these funds only if they have a high-risk appetite. Ideally, a well-diversified fund should hold no more than 50% of its assets in its top-10 stock holdings. Remember: Make sure your fund does not put all its eggs in one basket. Portfolio Turnover: The portfolio turnover rate refers to the frequency with which stocks are bought and sold in a fund’s portfolio. Higher the turnover rate, higher the volatility. The fund might not be able to compensate the investors adequately for the higher risk taken. Remember: Invest in funds with a low turnover rate if you want lower volatility.

Fund Management: The performance of a mutual fund scheme is largely linked to the fund manager and his team. Hence, it’s important that the team managing the fund should have considerable experience in dealing with market ups and downs. As mentioned earlier, investors should avoid fund’s that owe their performance to a ‘star’ fund manager. Simply because if the fund manager is present today, he might quit tomorrow, and hence the fund will be unable to deliver its ‘star’ performance without its ‘star’ fund manager. Therefore, the focus should be on the fund houses that are strong in their systems and processes. Remember: Fund houses should be process-driven and not 'star' fund-manager driven.

Costs: If two funds are similar in most contexts, it might not be worth buying mutual fund schemes that have high costs associated with it, only for a marginally better performance than others. Simply put, there is no reason for an AMC to incur higher costs, other than its desire to have higher margins.

The two main costs incurred are:

Expense Ratio: Annual expenses involved in running the mutual fund include administrative costs, management salary, overheads etc. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by investors in the form of an expense ratio. Remember: Higher churning not only leads to higher risk, but also higher cost to the investor. Also, Direct Plans exclude distribution costs, hence, a cheaper alternative to Regular Plans. Exit Load: Due to SEBI’s ban on entry loads, investors now have only exit loads to worry about. An exit load is charged to investors when they sell units of a mutual fund within a particular tenure; most funds charge load if the units are sold within a year from date of purchase. As exit load is a fraction of the NAV, it eats into your investment value. Remember: Invest in a fund with a low expense ratio and stay invested in it for a longer duration.

Besides, putting all your eggs in one basket can prove perilous. Hence, there is a need to diversify the investment over a set of schemes that have the capability to deliver superior risk-adjusted returns and have dealt with the market conditions tactfully.

After all, you require mutual fund schemes that stand by you in good times and in bad – meaning, the schemes need to manage the downside of the market well, apart from generating sound returns in a market rally.

In times of volatility, a SIP would undoubtedly be a prudent route as compared to investing your corpus as a lumpsum.

If the markets do not turn out in your favour and your SIP delivers disappointing returns, do not be dismayed. When investing in equity, it is important to keep a long-term investment horizon of five to seven years or more, even if you are investing via a SIP. The returns may be a few percentage points lower as compared to a lumpsum investment, but it will still be sufficient to meet your financial goals.

It is important to note that there are several benefits of investing via a SIP as a regular form of investment.

The top three reasons why you should invest in mutual funds through SIPs:

A hassle-free investment route Deals with market volatility Devoid of behavioural biases

Clearly, SIP-ping into mutual funds, with all these benefits and much more, will help achieve your financial goals.

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Author: Jason Monteiro

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