Best SIPs To Invest in 2019

By this time of the year, the fever of new-year resolutions has passed and many of us get busy with routine. Nonetheless, the enthusiasm to fulfil a few new-year resolutions lasts longer. Building a portfolio of the best mutual funds is one of them.

These days, many newspapers carry catchy headlines: “The best mutual funds schemes for 2019” or “Best mutual fund SIPs for 2019” or “Invest in mutual funds through Systematic Investment Plans (SIPs) this year”, among others.

Does the list of worthy mutual funds change with the changing calendar?

Yes, it does.

And should you change your portfolio accordingly every time?

No, you shouldn’t.

After doing a detailed analysis of mutual fund schemes over different time periods, PersonalFN has arrived at the conclusion that SIP remains one of the most suitable options for individual investors, particularly to accomplish long-term financial goals. However, going overboard with the winners of the past few years might create problems for you.

Take a look at PersonalFN’s findings…

PersonalFN ranked diversified equity mutual funds according to their percentile scores based on the 5-year point-to-point (P-2-P) returns generated by them between December 31, 2008, and December 31, 2018. Only 3 schemes (DSP Small Cap Fund-Reg(G), Canara Rob Emerg Equities Fund-Reg(G) and Principal Emerging Bluechip Fund(G) out of top ten schemes have managed to retain spots among the top ten even between December 31, 2018.

Table 1: Top 10 rankers in 2013 based on 5-year P-2-P performance

Scheme Name CAGR returns Rank (2013) CAGR returns Rank (2018)
31/Dec/08 To 31/Dec/13 31/Dec/13 To 31/Dec/18
ICICI Pru Value Discovery Fund(G) 29.2 1 17.8 33
Invesco India Multicap Fund(G) 27.7 2 18.8 30
DSP Small Cap Fund-Reg(G) 26.9 3 23.8 3
Reliance Multi Cap Fund(G) 26.9 4 15.6 56
IDFC Multi Cap Fund-Reg(G) 26.6 5 16.1 52
Canara Rob Emerg Equities Fund-Reg(G) 26.6 6 25.7 1
HDFC Mid-Cap Opportunities Fund(G) 26.3 7 21.2 11
Invesco India Midcap Fund(G) 26.2 8 21.1 13
Principal Emerging Bluechip Fund(G) 26.0 9 23.0 5
BNP Paribas Mid Cap Fund(G) 25.7 10 18.3 32
Data as on December 31, 2018
(Source ACE MF)

This goes to show that many schemes haven’t been consistently doing well and success isn’t permanent for a specific fund house or a scheme. On the contrary, in the race to garner more AUM (Assets Under Management) mutual funds they have been launching New Fund Offers (NFOs) providing a Rs 10/- investment proposition.

Now glance at the table below. Three schemes have spearheaded from nowhere. But, does that mean you should invest in them expecting their performance will remain the same for another five years?

Table 2: Top 10 rankers in 2018 based on 5-year P-2-P performance

Scheme Name CAGR returns Rank (2013) CAGR returns Rank (2018)
31/Dec/08 To 31/Dec/13 31/Dec/13 To 31/Dec/18
Canara Rob Emerg Equities Fund-Reg(G) 26.6 6 25.7 1
L&T Midcap Fund-Reg(G) 21.6 27 24.2 2
DSP Small Cap Fund-Reg(G) 26.9 3 23.8 3
Kotak Emerging Equity Scheme(G) 17.3 71 23.1 4
Principal Emerging Bluechip Fund(G) 26.0 9 23.0 5
Franklin India Smaller Cos Fund(G) 25.3 11 22.0 6
Quant Large & Mid Cap Fund(G) 10.4 100 22.0 7
Aditya Birla SL Pure Value Fund(G) 20.4 38 21.9 8
Edelweiss Mid Cap Fund-Reg(G) 22.5 22 21.4 9
ICICI Pru Midcap Fund(G) 19.5 47 21.3 10
Data as on December 31, 2018
(Source ACE MF)

Slicing data differently, PersonalFN found that the swing in rankings is not just for the top performers. In fact, rankings of a number of funds have changed upside down. Take a brief look at top gainers and losers.

Table 3: Top 10 ranking gainers

Scheme Name CAGR returns Rank (2013) CAGR returns Rank (2018) Swing in the ranking
31/Dec/08 To 31/Dec/13 31/Dec/13 To 31/Dec/18
Kotak Emerging Equity Scheme(G) 17.3 71 23.1 4 67
Aditya Birla SL Pure Value Fund(G) 20.4 38 21.9 8 30
L&T Midcap Fund-Reg(G) 21.6 27 24.2 2 25
Aditya Birla SL Midcap Fund(G) 19.5 46 19.6 25 21
Edelweiss Mid Cap Fund-Reg(G) 26.0 9 23.0 9 13
Canara Rob Emerg Equities Fund (G) 26.6 6 25.7 1 5
Franklin India Smaller Cos Fund(G) 25.3 11 22.1 6 5
Sundaram Mid Cap Fund(G) 23.3 19 20.9 14 5
Principal Emerging Bluechip Fund(G) 26.0 9 23.0 5 4
Franklin India Prima Fund(G) 24.5 16 21.2 12 4
Data as on December 31, 2015
(Source ACE MF)
Note: The above rankings for ELSS are by no means recommendations.

Only a few schemes such as Canara Robeco Emerging Equities Fund (G)and Principal Emerging Bluechip Fund have managed to be in the top 10 ranks in the two time periods.

Table 4: Top 10 ranking losers…

Scheme Name CAGR returns Rank (2013) CAGR returns Rank (2018) Swing in the ranking
31/Dec/08 To 31/Dec/13 31/Dec/13 To 31/Dec/18
UTI Value Opp Fund-Reg(G) 22.8 21 11.4 94 -73.0
Templeton India Equity Income Fund(G) 22.2 23 12.8 82 -59.0
Quantum Long Term Equity Value Fund(G)-Direct Plan 24.5 15 14.6 69 -54.0
Reliance Multi Cap Fund(G) 26.9 4 15.6 56 -52.0
IDFC Multi Cap Fund-Reg(G) 26.6 5 16.1 52 -47.0
ICICI Pru Bluechip Fund(G) 23.2 20 14.8 66 -46.0
L&T India Large Cap Fund-Reg(G) 20.5 34 13.0 79 -45.0
Franklin India Bluechip Fund(G) 19.6 45 12.7 84 -39.0
Aditya Birla SL Frontline Equity Fund(G) 21.0 31 14.8 68 -37.0
HDFC Top 100 Fund(G) 20.5 36 14.5 70 -34.0
Data as on December 31, 2015
(Source ACE MF)

Unless you know what caused the position of diversified equity mutual fund schemes to improve or deteriorate, you will never know which one is the best for you! Here you might need expert advice.

The key lessons to here are:
  • - Irrespective of the fund’s P2P historical performance, the performance via a SIP may differ over a period of time.

  • - The best mutual fund today may not be the best mutual fund tomorrow or the best mutual fund for a SIP.

There’s nothing called as the best SIPs for 2019. You should invest in the right mutual fund schemes that are in line with your risk profile, investment objectives, financial goals and the time horizon before goals befall. Based on this chart out a personalised asset allocation to diversify your investments across asset classes.

Before you decide to start a SIP in a mutual fund schemes in 2019, you should know how to select a mutual fund scheme wisely.

And selecting them based on ratings could be a mistake because most of these popular star ratings are based on historical returns and many schemes have undergone changes after the capital market regulators mutual fund re-categorisation norms.

[Read: Why You Should Stop Looking At Mutual Fund Star Ratings Now]

How to pick the best mutual funds to invest via SIPs?

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.

You need to do a lot of data crunching, assess the risk-returns, expense ratio, portfolio characteristic vis-a-vis other schemes and study a number of qualitative factors.

[Read: Why Qualitative Aspects Are So Important To Pick Mutual Funds ]

Watch this video on how to select winning mutual funds:

PersonalFN follows a comprehensive mutual fund research process encompassing both quantitative and qualitative parameters.

Parameters you should use to shortlist mutual fund schemes…
  • 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 the 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. In fact, though 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 explains how much risk the fund has undertaken to clock higher returns.

    4. Risk: To put it simply, risk is the outcome you get which is opposite/contrary to what’s expected. The actual outcome, when different from the expected outcome is referred to as a deviation. When we talk about the 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 the 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 with the least 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, this is important to know because choosing a fund that has delivered higher risk-adjusted returns makes better. In fact, this ratio tells us whether the high returns of a fund are attributed to good investment decisions or to taking a 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.
    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 house might be unable 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.

    You should avoid funds that owe their performance to a ‘star’ fund manager. Simply because the fund manager is present today, but he could quit tomorrow, and the fund will be unable to deliver its ‘star’ performance without its ‘star’ fund manager.

    Therefore, the focus should be on 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 the mutual fund scheme that has high costs associated with it, only for a marginally better performance than the other scheme. 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 a higher cost to the investor. Also, Direct Plans exclude distribution costs, hence, are 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. Basically, 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 lump sum.

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 lump sum 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.

Graph: FIIs ditching India

[Read: All You Need To Know About SIPs ]

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

PS: Still undecided about mutual funds for starting a fresh SIP? Don’t worry. PersonalFN is offering you three premium research reports at a price lesser than that of your favourite coffee.

Graph: FIIs ditching India

These research reports will provide you superlative guidance to select worthy mutual fund schemes to SIP, the ones that have the potential to provide BIG gains, and the ones for your tax planning this year. Click here for PersonalFN’s recommendation and subscribe now!

Author: PersonalFN Content & Research Team