In this article, I will share my Top 10 Best SIP Mutual Funds to invest in India in 2020. Yearly I will publish my Top 10 Best SIP Mutual Funds to invest in India. Continuing that trend, I will publish the list for 2020.
Earlier I used to publish the list well in advance may be before January. However, this time it was delayed as I was messed up with my Fee-Only Financial Planning tasks. I am receiving huge client inflow that turning to be hectic for me. Hence, I delayed posting this yearly post on time. Many asked me through comment and email that when I am publishing the post. I promised them that I will publish it before February 2020. Accordingly, I am publishing the post.
Let us recap of what major changes happened during 2-3 years in Equity Fund place (I am not discussing here about the debt funds issues as this post is meant for equity funds).
Two major things happened to the Mutual Fund industry during the 2018 years.
# SEBI Recategorization-SEBI came up with a new set of categorization. This was a huge shock to the Mutual Fund Industry. Because many funds are forced to merge with similar funds offered in the AMC. Also, this gave the investors about the clarity of the fund types. (Refer my post “SEBI Mutual Fund Categorization and Rationalization – How it helps investors? “). However, due to this big change, Large Cap may suffer to beat the index.
# TRI (Total Return Index)- When you invest in stocks, there are two types of benefits. One is price appreciation in the stock and another is dividend income. Earlier the mutual fund companies use to benchmark the indexes which are not inclusive of dividend income. With new SEBI ruling now all mutual fund companies are forced to benchmark the respective TRI Index for their funds.
There was again a rumor that SEBI is once again thinking of recategorization of funds. It is confirmed also during the last SEBI Board Meeting that they are seriously considering to recategorization process. However, even if such changes happen, I hardly change my stance immediately.
Before proceeding further, I wish to make sure what are the basics of investing while investing. Many fail to understand the basics of investing and simply jump for fund selection and start investing. It is the most dangerous activity you are doing with your hard-earned money.
Why I have to invest?
Before a BLIND investment, it is always best that you must know the reason for your investment. Hence, before jumping into investment read what I am sharing below.
You must have a proper Financial Goal
I noticed that many investors simply invest in mutual funds just because they have some surplus money. The second reason may be someone guided that mutual funds are best in the long run compared to Bank FDs, PPF, RDs, or even LIC endowment products.
If you have clarity like why you are investing, when you need the money and how much you need money at that time, then you will get better clarity in selecting the product. Hence, first, identify your financial goals.
You must know the current cost of that goal. Along with that, you must also know the inflation rate associated with that particular goal. Remember that each financial goal has its 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.
I have written a separate post on how to set your financial goals. Read the same at “Financial Goals – How to set before jumping into investing?”
Asset Allocation is MUST
Next step is to identify the asset allocation. Whether it is a short-term goal or long-term goal, the proper asset allocation between debt and equity is a must. I personally suggest the below-shared asset allocation strategy. 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 60:40.
If the goal is more than 10 years-Allocate debt:equity in the ratio of 40:60.
While choosing a debt product, make sure that the maturity period of the product must match your financial goals. For example, PPF is the 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 6% to 7% returns.
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 40:60. Return expectation from debt is 6% and equity is 10%, then the overall portfolio return expectation is as below.
(60% x 10%) + (40% x 6%)=8.4%.
How much to invest?
Once the goals are defined with the target amount, asset allocations are 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 it. One is a constant monthly investment throughout the goal period. Second is increasing some fixed % each year up to the goal period. Decide which suits best to you.
I 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 a maximum of 3-4 funds, you can easily create a diversified equity portfolio.
Having more funds does not give you enough diversification. Instead, in many cases, it may create your portfolio overlapping and leads to underperformance.
Taxation of Equity Mutual Funds for 2020-21
Remember that Equity Funds and Debt funds are taxed differently. Hence, you must understand the taxation part as well before jumping into investment. I tried to explain the same in the below image.
The rate of taxation is as below for the FY 2020-21 is as below.
Below is the DDT Rates applicable to Mutual Funds after the Budget 2020.
I hope the taxation part is clear to all of you. If you still have doubt, then refer my latest post ” Mutual Fund Taxation FY 2020-21 (AY2021-22)“.
I am moving to Index Funds
Yes, last year in large-cap space, I recommended the Index Funds. The rest of the funds were active funds. However, this year, I am recommending large-cap and mid-cap funds in Index Funds itself. I am slowly coming out from relying on fund managers’ ability to beat the index at a high cost. Instead, I am adopting the low-cost index funds.
What are the criteria to choose the Best Index Funds?
# Expense Ratio:-Lower the Expense ratio is better for me.
# Tracking Error:-It is nothing but how much is the fund deviated in terms of returns with respect to the Index it is benchmarked. Lower the tracking error means better the fund performance.
# AUM:-Higher the AUM means better the advantage for the fund manager to manage the liquidity issues.
By adopting the Index investing, you are ending the search for BEST MUTUAL FUND COMPANY and BEST FUND MANAGER. The only risk you can’t avoid is market risk, which you have to manage it by proper asset allocation between debt and equity (I mean at the portfolio level).
However, adopting Index investing requires lot of patience. Because even though many claims to be patience, they take knee jerk reaction when the market starts to fall.
The negativity of Index Funds is that there is no downside protection as the fund manager has to replicate the index. He can’t take his call and make sure to keep in cash mode during the market fall. Hence, the Index Funds will fall equally like Index.
During this phase, many investors start to compare the Index Funds with Active Funds (which may be managed the downside protection well) leading to come out from Index Funds.
However, if one did the proper asset allocation with debt and equity (within equity also) with respect to their goals, then we can easily protect such a downfall at the portfolio level.
Paying a higher fee for active funds ist justified only if the fund manager generates more than ONE PERCENT compare to Index Funds CONSISTENTLY. If it is not possible, then there is no point in adopting the active funds.
Today morning I was reading a wonderful book “Winning the Loser’s Game” by Charles D Elles. I wish to share one image of that book with you all (even though many may argue that it may not be applicable to India. But I feel Index Investing is the future for India too. If you noticed, many AMCs sensing this opportunity, launched and launching many Index Funds).
You noticed that only around 32% of equity mutual funds outperform the S&P 500 from the period of 1989-2008. I am lucky enough if my investment is with that 32 % of the funds. Otherwise, there is no point in paying higher fees to active fund managers. Data may look old of almost 12 years. However, what if such an event happened in India?
It is the toughest task for ME and YOU to find such a RAREST of RARE SPECIES (FUND MANAGER) who can generate CONSISTENTLY more than 1% higher returns than the BENCHMARK.
Because of all these returns and after a lot of reading, I adopted the Index investing (Thanks to John C Bogle also).
I am not saying that all the funds are Index Funds. However, in the case of Large and Mid-Cap, I am recommending Index Funds. I am going to stay away from any Small Cap Funds. Along with Large and Mid Cap Funds, to create certain downside protection within the equity, I am recommending either Hybrid Fund or Multi-Cap Funds.
Top 10 Best SIP Mutual Funds to invest in India in 2020
Now let us move on and share with you my Top 10 Best SIP Mutual Funds to invest in India in 2020.
Best SIP Mutual Funds to invest in India in 2020 -Large Cap
Last year I recommended two Large Cap Index Funds. I am retaining the same funds for this year too.
# UTI Nifty Index Fund-Direct-Growth
# HDFC Index Fund Sensex Plan-Direct-Growth
Best SIP Mutual Funds to invest in India in 2020 -Mid Cap
Last year, I recommended two active Mid Cap Funds. One is HDFC Mid Cap Opp Fund and Franklin India Prima Fund. However, this year, I am recommending Nifty Next 50 Index Funds in the place of Mid Cap Funds.
But Nifty Next 50 Index Funds by definition is a Large Cap Fund, then why I am recommending it as a Mid Cap Fund?
Refer to the below image shared by Mirae Asset AMC.
Nifty Next 50 is actually an essence of both large cap and mid cap. Because of this, it acts with the same volatility like mid cap. Hence, I am suggesting Nifty Next 50 as my mid cap fund than particular Mid Cap Active or Index Funds.
My choices are as below:-
# ICICI Pru Nifty Next 50 Index Fund-Direct-Growth
# UTI Nifty Next 50 Index Fund-Direct-Growth
If you are not fond of this idea, then you can choose active funds also. My recommendation from active funds in mid cap category are:-
# HDFC Mid Cap Opp Fund-Direct-Growth
# Franklin India Prima Fund-Direct-Growth
Personally, I am creating a blend of Nifty 50 and Nifty Next 50 with 50:50 or 70:30 to fill the gap of Large Cap and Mid Cap with these two categories of Index Funds.
However, those who already invested in active mid cap funds can continue and slowly move to Nifty Next 50.
Best SIP Mutual Funds to invest in India in 2020 -Multi-Cap
Last year I recommended Parag Parikh Long Term Equity Fund and Quantum Long Term Equity Value Fund. I am retaining Parag Parikh Long Term Equity Fund. I am recommending Axis Multi Cap Fund over the Quantum Long Term Equity Value Fund.
# Parag Parikh Long Term Equity Fund-Direct-Growth
# Axis Multi Cap Fund–Direct-Growth
Best SIP Mutual Funds to invest in India in 2020 -Small Cap
I personally not recommending any Small Cap to my clients. However, if you know how to time the market and play with your money, then you can experiment with these two funds which last year also I recommended.
# DSP Small Cap Fund-Direct-Growth
# Frankin India Smaller Companies Fund-Direct-Growth
Best SIP Mutual Funds to invest in India in 2020 – Equity Oriented Balanced Funds or Aggressive Hybrid Fund
Last year I recommended HDFC Hybrid Equity Fund and Franklin India Equity Hybrid Fund. This year too, I am retaining the same funds due to their consistent long term performance.
# HDFC Hybrid Equity Fund-Direct-Growth
# Franklin India Equity Hybrid Fund-Direct-Growth.
You may have a look at ICICI Pru Equity and Debt Fund also.
Finally, my list of Top 10 Best SIP Mutual Funds to invest in India in 2020 is as below.
Your views may differ from my view. It does not mean I am PERFECT or my strategy itself the BEST. However, I am following this simple strategy for myself and for my clients also.
What is my style of construction Equity Portfolio?
I have listed all the funds above. However, I suggest constructing the portfolio as below within your equity portfolio.
50% Large Cap Index+30% Nifty Next 50+20% Hybrid Funds
50% Large Cap Index+30% Nifty Next 50+20% Multi Cap Funds
50% Large Cap Index+20% Nifty Next 50+30% Hybrid Funds
50% Large Cap Index+20% Nifty Next 50+30% Multi Cap Funds
Disclosure:-I have investments in HDFC Index Fund Sensex Plan and HDFC Hybrid Fund as equity part of my daughter’s educational goal. Also, I have investments in UTI Nifty Index Fund, ICICI Pru Nifty Next 50 Index Fund and HDFC Hybrid Fund as equity part of my retirement goal.