Market at All-time High: How to Select the Best Mutual Funds for SIP Investment Now?

The equity market at record high has helped existing investors in equity mutual funds to reap the benefits of their SIP investments. Notably, the monthly SIP contributions and the number of SIP folios too have touched record highs, according to the latest data from the Association of Mutual Funds in India (AMFI).

However, individuals who are planning to invest in equity mutual funds at a market high may find it challenging to select the best mutual fund for SIP investment at this stage because most schemes have generated stellar returns. During such scenarios, investors often tend to select top-3 or top-5 schemes on the returns chart, assuming that it will continue its superior performance. While doing so. they usually ignore other key parameters that are necessary for selecting the best mutual funds for SIP.

But this is not a prudent approach to selecting the best mutual fund schemes for SIP investment because it ignores various important selection parameters.

You will be surprised to know that a top-rated scheme of a particular period may not even figure among the top-10 schemes of another market phase.

How investors may select the best mutual fund for SIP with market at an all-time high

I. Quantitative parameters

1) Past performance

While past performance is not indicative of how the fund will perform in the future, it is a useful tool to determine how consistently the scheme has performed.

Assess the SIP performance of the scheme relative to its benchmark and the category peers across various time frames such as 1-year, 3-year, 5-year, 7-year, since inception, etc.

In addition, assess how consistently the fund has performed across bear and bull market phases relative to its benchmark and the category peers. While most mutual funds perform better during market highs, the real test is to determine how well the scheme manages the downside risk during market corrections.

2) Risk-adjusted returns

With markets at an all-time high, the valuations have soared and are nearing the expensive zone. Therefore, any potential negative trigger can adversely affect the market and SIP returns. However, the impact of volatility can be mitigated if the fund manager deploys efficient risk-management techniques. To determine a scheme's ability to reward investors adequately for the level of risk taken, evaluate the scheme on various risk parameters such as Standard Deviation, Sharpe Ratio, Sortino Ratio, etc.

3) Portfolio quality

The performance of a mutual fund is extensively dependent on the quality of its underlying portfolio, i.e. stocks, sectors, and market cap allocation. Therefore, ensure that the scheme is well-diversified across stocks and sectors to avoid concentration risk. Also, determine whether the fund chases momentum bets or holds each of its stock with high conviction over the long run. In case of former, the portfolio could be prone to higher volatility.

II. Qualitative parameters

Qualitative parameters are often overlooked, but they play an equally important part in selecting a winning mutual fund. Analyse the below factors to determine if the fund scores high on qualitative parameters:

1) Efficiency of the mutual fund house

Always give higher importance to fund houses that follow sound risk management techniques and have robust investment systems and processes in place. Schemes that follow prudent investment practices can be expected to form consistently well over the long run, even though they may underperform in the interim.

2) Experience of the fund manager

The performance of a mutual fund is directly dependent on the ability of its fund manager to timely identify various opportunities available in the market. This makes it crucial to check the qualification and experience of the fund manager and the track record of the other schemes they manage.

The special care to take while selecting mutual funds for SIP at market high

a) Select the right schemes

Even if investors select the best mutual fund for SIP, they may still fall short of their goal if the scheme/s do not align with their financial goals, risk profile, and investment horizon. This is because different mutual fund schemes have different investment styles, strategies, objectives, risk profile, etc. It is important that individuals evaluate their needs and select schemes appropriately.

For instance, if conservative investors invest in high-risk categories such as Mid Cap Mutual Funds swayed by the market optimism, they are likely to feel the heat and redeem investments when market conditions turn bearish.

b) Invest adequate amount

Investing an adequate amount regularly (regardless of the market conditions) is of utmost importance to achieve the desired goals within the set time frame. To determine the amount to be invested in mutual fund schemes regularly via SIP, it is important to set realistic return expectation. Additionally, investors need to adjust the investment amount for inflation.

PersonalFN's SIP calculator can help investors to calculate the value of monthly SIP by simply entering a few details -- the monthly SIP amount, the SIP tenure, and the expected rate of return from the mutual fund scheme in which they intend to invest.

c) Keep emotions at bay

Extreme market conditions often make investors question their investment decision. Some investors may be sceptical about starting new SIP investment, while others may think of redeeming their existing units during market highs. However, the benefits of SIP will be only available if investors invest regularly regardless of market conditions.

Discontinuing SIP when the market is at an all-time high or all-time low goes against the principle of disciplined investing; investors might lose the advantage of compounding and thereby miss the investment target. Therefore, it is important to stick with the mutual fund investment till the goal is achieved.

[Read: Sensex at All-time High: Is It Time to Sell Your Equity Mutual Funds?]

To conclude:

Investing in mutual funds via SIP is one of the most effective ways to achieve financial goals. However, investors must ensure that they select the best mutual funds for SIP by evaluating it on various quantitative and qualitative parameters. One should ideally avoid investing in mutual funds with a short-term view. Furthermore, investors need to ensure that the scheme that they have selected aligns with their investment objective. Lastly, investors must invest an adequate amount and continue the investments until the set goal is achieved.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.