Last year I published the list of Top 10 Best SIP Mutual Funds to invest in India in 2016. Now few started to force me to publish the post for Top 10 Best SIP Mutual Funds to invest in India in 2017. But before proceeding further, let us review the funds which I recommended last year.
Below is the performance report of the funds which I recommended last year.
Before jumping into the selection of mutual funds, this time I thought to guide you why you MUST invest in equity mutual funds. The points are listed as below.
You must have a proper Financial Goal
I noticed that many of investors simply invest in mutual funds just they have some surplus money. The second reason may be someone guided that mutual funds are best in long run compared to Bank FDs, PPF, RDs, or even LIC endowment product.
If you have clarity like why you are investing, when you need money and how much you need money at that time, then you will get the better clarity in selecting the product. Hence, first identify your financial goals.
You must know the current cost of that particular goal. Along with that, you must also know the inflation rate associated with that particular goal. Remember that each financial goal to have it’s own inflation rate. For example, education or marriage cost of your kid’s is different inflation that the inflation rate of household expenses.
By identifying the current cost, time horizon and inflation rate of that particular goal, you can easily find out the future cost of that goal. This future cost of the goal is your target amount.
Asset Allocation is MUST
Next step is to identify the asset allocation. Whether it is short term goal or long term goal, the proper asset allocation between debt and equity is a must. I personally prefer the below asset allocation. Remember that it may differ from individual to individual. However, the basic idea of asset allocation is to protect your money and smoothly sail to reach the financial goals.
If the goal is below 5 years-Don’t touch equity product. Use the debt products of your choice like FDs, RDs or Debt Funds.
If the goal is 5 years to 10 years-Allocate debt:equity in the ratio of 40:60.
If the goal is more than 10 years-Allocate debt:equity in the ratio of 30:70.
While choosing debt product, make sure that the maturity period of the product must match your financial goals. For example, PPF is best debt product. However, it must match your financial goals. If the PPF maturity period is 13 years and your goal is 10 years, then you will fall short of meeting your financial goals.
Next and the biggest step is the return expectation from each asset class. For equity, you can expect around 10% to 12% return. For debt, you can expect around 7% return expectation.
When your expectations are defined, then there is less probability of deviating or taking knee-jerk reactions to the volatility.
Portfolio Return Expectation
Once you understand how much is your return expectation from each asset class, then the next step is to identify the return expectation from the portfolio.
Let us say you defined the asset allocation of debt:equity as 30:70. Return expectation from debt is 7% and equity is 10%, then the overall portfolio return expectation is as below.
(70% x 10%) + (30% x 7%)=9.1%.
How much to invest?
Once the goals are defined with target amount, asset allocations is done, return expectation from each asset class is defined, then the final step is to identify the amount to invest each month.
There are two ways to do. One is constant monthly SIP throughout the goal period. Second is increasing some fixed % each year up to the goal period. Decide which suits best to you.
Hope the above information will give you clarity before jumping into equity mutual fund products.
How many mutual funds are enough?
How many mutual funds do we have? Is it 1, 3, 5 or more than 5? The answer is simple…you don’t need more than 3-4 funds for investing in mutual funds. Whether your investment is Rs.1,000 a month or Rs.1 lakh a month. With the maximum of 3-4 funds, you can easily create a diversified equity portfolio.
Having more fund does not give you enough diversification. Instead, in many cases, it may create you portfolio overlapping and leads to underperformance.
Now let us move to the selection of mutual funds.
How I selected Top 10 Best SIP Mutual Funds to invest in India in 2017?
I will first screen the top 15 funds in each category based on their returns to benchmark since inception. The funds who consistently beaten the benchmark are listed in that 15. Once I have the list in my hand, then I select the funds based on Risk-Return Analyzer.
Many simply select the funds based on eye-catching returns. However, at what cost the fund is giving you a better return? To what extent it protects my investment during a downturn is what differentiate from good fund to bad fund.
I used Freefincal’s Mutual Fund Screener tool to shortlist the top 15 funds in each category.
Again, I am not saying that these 1o funds alone be considered as “Top 10 Best SIP Mutual Funds to invest in India in 2017”. There may be fewer other funds, which are good to compete with these funds. However, I may be biased towards few Mutual Fund Companies (purely on their size and how long they are in MF business in India). Below are the metrics I used to arrive at finally selecting the funds.
If the fund cleared all these tests and given me around a minimum of 80% score since inception, will be added to my list. I used Freefincal’s Risk-Return Analyzer tool to arrive at a final selection of funds.
- Beta-Volatility measure and tell how much the fund changes for a given change in the Index. Lower the beta, lower the volatility. Hence, your fund must have lower beta.
- Standard deviation-It tells us how for a given set of returns, how much do fund returns deviate from the average. Lower the standard deviation, lower the volatility. Hence, your fund must have lower beta.
- Alpha-It is the risk-adjusted measure. By taking risks, how much the fund manager generated the return over the benchmark. Higher the alpha, higher the outperformance of the fund.
- Sharpe Ratio-It is the risk-adjusted measure. Higher the Sharpe ratio, better is the performance.
- Sortino Ratio-It is the risk-adjusted measure. Higher the Sortino ratio, better is the performance.
- Treynor Ratio-It is also be known as reward ratio. Higher the Treynor ratio, better is the performance.
- Information Ratio-This is calculated by average excess return obtained compared to a benchmark and divides it by the standard deviation of excess returns. Higher the information ratio, higher the consistency in beating the benchmark.
- Omega Ratio- It is a risk-return performance measure of an investment asset.
- Downside deviation-This is also be called as BAD RISK.
- Upside potential-This is exactly the opposite of Downside deviation.
- R-squared- It is a measure of how correlated the fund’s NAV movement is with its index.
- SIP Returns-For how many times the fund’s returns are above the index when we invest in SIP.
- Lump Sum Returns-For how many times the fund’s returns are above the index when we invest in a lump sum.
Below are my selection in each category of funds.
Best SIP Mutual Funds to invest in India in 2017 -Large Cap
In this category, I found that funds like SBI Bluechip and Birla Sunlife Frontline Equity Fund are also best. However, I am going with below choices.
Check the consistency of Franklin India Bluechip Fund from this below image.
Check the consistency ratio of ICICI Pru Focussed Bluechip Fund in the below image.
As I said above, there are other funds also which scores equal or more than these two funds. But I stick to these two funds. There is no reason of negating these two funds.
Best SIP Mutual Funds to invest in India in 2017 -Multi Cap
Again in this category of funds, I found few funds like SBI Magnum Multiplier Fund and Franklin India High Growth Companies Fund. However, I stick to below two funds and which are my favorite too.
Check the consistency ratio of Franklin India Prima Plus Fund in below image.
You may notice that for a 1-year return the score is dropped below 80 and currently showing as 70. However, due to it’s long best track record, I suggest to invest and continue in the same fund (if few already invested in this fund).
Check the consistency ratio of ICICI Pru Value Discovery Fund in below image.
Same is the case with ICICI Fund also. However, considering the consistency and just a drop in that for a year does not mean that we must neglect this fund. Hence, I will stick to this fund.
Best SIP Mutual Funds to invest in India in 2017 -Mid Cap
Last year I selected HDFC Midcap Opp Fund and also Franklin India Prima Fund. I am continuing with same funds.
Check the consistency performance of HDFC Mid Cap Opp Fund in below image.
Check the consistency performance of Franklin India Prima Fund in below image.
A drop in a year from both funds does not mean they are BAD. Hence, considering the consistency of fund since long, I am suggesting these two as best funds.
Best SIP Mutual Funds to invest in India in 2017 -Small Cap
In small cap category, the funds in my mind are Canara Robeco Emerging Equities Fund, DSPBR Micro Cap Fund, and Franklin India Smaller Companies Fund. In these three, I go with DSPBR and Franklin.
I am unable to generate the consistency score for both the funds. I will update the image once I am able to do so. However, these two funds are my favorite among small cap.
Best SIP Mutual Funds to invest in India in 2017 -Equity Oriented Balanced Funds
Among this category, I have in mind the funds like HDFC Balanced Fund, ICICI Pru Balanced Fund, Tata balanced Fund and Franklin India Balanced Fund. But I go with HDFC and ICICI.
These are my choices of Best SIP Mutual Funds to invest in India in 2017. It does not mean that they are universal choices. There are certain other funds too. However, I stick to these funds as my best choices.
Any doubts? If so, then you can use the comment section or BasuNivesh Forum.