How To Pick The Best Mutual Funds For SIPs in 2018
Feb 21, 2018

Author: PersonalFN Content & Research Team


Even if you pick the best performing mutual fund, it may NOT always be the best mutual fund when invested though a Systematic Investment Plan (SIP).

Strange, isn’t it? But it’s a fact.

On analysing the performance data of equity diversified schemes, it has been found that the performance ranking differs when comparing the point-to-point performance and returns generated via a SIP in the fund.

See for yourself in the table below:

Best Mutual Funds For SIPs in 2018? Think Again…

Scheme Name P2P CAGR (%) SIP XIRR (%) Rank P2P Rank SIP Difference In Ranking
Aditya Birla SL India Opportunities Fund 25.52 23.77 18 39 -21
SBI Magnum MidCap Fund 25.08 24.23 21 35 -14
UTI Mid Cap Fund 26.64 25.57 13 25 -12
BNP Paribas Mid Cap Fund 24.06 24.13 25 37 -12
Tata Mid Cap Growth Fund 24.86 24.64 23 31 -8
Franklin India Smaller Cos Fund 29.20 29.18 6 11 -5
Franklin India Prima Fund 25.27 25.58 20 24 -4
ICICI Prudential Midcap Fund 25.39 25.96 19 22 -3
Edelweiss Mid and Small Cap Fund 27.46 29.08 10 12 -2
Sundaram Select Midcap 25.96 26.84 15 17 -2
Aditya Birla SL Pure Value Fund 29.42 30.91 5 6 -1
Principal Emerging Bluechip Fund 26.76 28.69 12 13 -1
HDFC Mid-Cap Opportunities Fund 25.89 26.26 17 18 -1
SBI Small & Midcap Fund 36.68 39.96 1 1 0
Reliance Small Cap Fund 35.25 36.90 2 2 0
DSPBR Micro-Cap Fund 31.85 33.38 3 3 0
Mirae Asset Emerging Bluechip 30.48 31.77 4 4 0
Canara Rob Emerging Equities Fund 29.09 30.76 7 7 0
Sundaram S.M.I.L.E Fund 27.54 29.87 9 9 0
L&T India Value Fund 25.95 27.34 16 16 0
Reliance Mid & Small Cap Fund 24.95 26.01 22 21 1
L&T Midcap Fund 28.85 31.03 8 5 3
Aditya Birla SL Small & Midcap Fund 27.34 30.05 11 8 3
HSBC Midcap Equity Fund 26.12 29.82 14 10 4
DSPBR Small & Mid Cap Fund 23.97 26.12 27 20 7
Kotak Emerging Equity Scheme 24.54 27.81 24 14 10
Tata Equity P/E Fund 23.19 26.13 31 19 12
Kotak Midcap Scheme 22.62 25.93 35 23 12
HDFC Small Cap Fund 23.52 27.38 28 15 13
P2P - Point to point; SIP - 1st of every month, February 1, 2013 to January 1, 2018. Valuation date: February 1, 2018
(Source: ACE MF, PersonalFN Research)

PersonalFN considers the performance of equity diversified mutual fund schemes over a five-year period for this study. Of these, the top 25 schemes in terms of point-to-point (P2P) performance are considered.

We then compared the P2P performance to the annualised returns (XIRR) generated via a SIP. The P2P returns and SIP returns are ranked and then compared.

On studying this data closely, it is seen that though Aditya Birla SL India Opportunities Fund ranked 18th in terms of point-to-point returns, it fell to the 39th rank when comparing the SIP performance.

Similarly, UTI Mid Cap Fund ranked in 13th place when considering single period returns. A SIP in the same fund over generated a return that ranked the fund 25th on the list.

Schemes that have delivered inferior performances on a point-to-point basis may do well if invested in systematically. HDFC Small Cap Fund took 28th place for its point-to-point performance. However, the returns generated via a SIP would have ranked the fund in the 15th place.

Kotak Emerging Equity Scheme too, ranked on the 35th position for its returns over five years. A SIP over the same period in the scheme would have ranked it in the 23rd place.

(Use this SIP Calculator to calculate your mutual fund SIP returns.)

This is just a short study over a single period. An extensive study will be even more revealing. However, the conclusion is expected to be the same.

Hence, the top 10 SIP plans today, will not necessarily continue as the top SIP plans over the next few years. The investment horizon will play an important role as well.

This is why SIPs need to be understood better.

Understanding how SIPs work through this study will help you pick SIP-worthy mutual funds.

How do mutual fund SIPs work?

A SIP is merely a method of investing. The primary objective of a SIP is to lower the average cost of investment as much as possible, in order to generate the maximum returns.

By this rationale, a drop in NAV may not seem good when considering point-to-point (P2P) returns, but it helps lower the average cost of purchase. When the NAV moves back up, you will be sitting on higher returns if had you invested via a SIP.

The fall in NAV or rather the fund’s volatility matters for investments via a SIP. The higher the extent of fall, lower will be the average cost; and hence, returns too will be better.

For example, let’s consider a SIP in two different schemes – Fund A and Fund B. Let’s assume both have a starting NAV of Rs 10. The monthly investment is Rs 1,000.

Now study the table below:

Month NAV
Fund A
Fund B
Fund A
Fund B
1 100 100 10.00 10.00
2 110 115 9.09 8.70
3 107 103 9.35 9.71
4 108 102 9.26 9.80
5 110 110 9.09 9.09
Total Units 46.79 47.30
Final Value 5146.56 5202.91

As seen in this table at the end of Month 5, the ending NAV of the both the funds is same, hence, the P2P returns in both cases is 10%.

However, the volatility of both the funds differed. The NAV of Fund A was relatively stable when compared to Fund B. On the flip side, the additional volatility of Fund B helped to lower the average cost of investments.

The average NAV cost under Fund A worked out to Rs 107, while for Fund B it was 106. Naturally, a SIP in Fund B did better than Fund A.

The key lesson here is that irrespective of the fund’s P2P performance, the performance via a SIP will differ.

When investing via a SIP, you need to keep this in mind.

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 fund to invest via a SIP?

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 large cap 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; which 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:
    1. 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 doesn’t make sense comparing the performance of a mid-cap fund to that of a large-cap. Remember: Don’t compare apples with oranges. 
    2. 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. 
    3. 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. 
    4. Risk: To put it simply, risk is a result or outcome which is other than what is / was expected. The outcome, when different from the expected outcome is referred to as a deviation. When we talk about expected outcome, we are referring to the average or what is technically called the mean of the multiple outcomes. Further filtering it, the term risk simply means deviation from average or mean return. 

      Risk is normally measured by Standard Deviation 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 risk profile 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 which has taken less risk i.e. the fund that has a lower SD. 
    5. Risk-adjusted return: This is normally measured by Sharpe Ratio. 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 which 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. 
    6. 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
    7. 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 scheme which has a high costs associated with it, only for a marginally better performance than the other. 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:
  1. 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.
  2. 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 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:

  1. A hassle-free investment route
  2. Deals with market volatility
  3. Devoid of behavioural biases

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


Best Midcap Funds For 2018. Look Before You Leap!

Editor’s note:

PersonalFN understands that not all investors are equipped with wherewithal to select the best mutual fund schemes for their portfolio. One would have to spend hours analysing mutual fund schemes in order to arrive at the right list for them. Thus, PersonalFN saves you the trouble and does all the tedious number-crunching work for you.

As mentioned in the article, SIP is only a method of investing in mutual funds. To support this investment method, you also need to pick the right mutual funds. PersonalFN offers a report titled "The Super Investment Portfolio – For SIP Investors."

After a rigorous shortlisting process, PersonalFN goes a step ahead when selecting funds that are SIP-worthy. Under this, PersonalFN conducts a detailed analysis on how SIPs in the top shortlisted funds have performed across multiple market conditions and timeframes. Only those funds that successfully pass this evaluation are suggested.

You can read more about the report and the subscription details here: The Super Investment Portfolio – For SIP InvestorsDon’t miss out on special discounts. Subscribe Now!

Add Comments

Apr 30, 2018

Dear Sir/Madam, Please guide best sip in 2018 (use for Child sip)
Apr 30, 2018

Dear Sir/Madam, Please guide best sip in 2018 (use for Child sip)
Dec 13, 2018

Please guide me.i wish my daughter to invest 10lakh in mutual fund
Feb 13, 2019

Can i have the Best SIP to invest?
Jul 09, 2018

I have invested in the following mutual funds as SIP. Can you please review my MF portfolio and advise if i should change anything: 1. ABSL FRONTLINE EQUITY -2 K 2. SBI EMERGING BUSINESS – 1 K 3. ABSL GENEXT FUND -2 K 4. ABSL PURE VALUE -2K 5. FRANKLIN SMALLER COMPANY- 3K 6. IDFC PREMIUM EQUITY – 2K 7. RELIANCE TAX SAVER -2.5K 8. ABSL TAX RELIF 96 -1.5K 9. AXIS LoNG TERM FUND -2K 10. SBI GOLD FUND- 1K Thanks & Regards RITESH RANJAN
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