Calendar year 2016 is on the corner and the time has come to review your mutual fund portfolio to weed out the under former and add new funds to boost and balance your portfolio.
Before moving on the with the selection process first I would like to highlight that investing in mutual funds is as risky as investing in stock market and tends to provide good returns in long term only but you can minimize the risk by following SIP (Systematic Investment Plan) method. Though there are contradictory views on SIP method because when the market bottoms out SIP tends to earns units lesser than lumps sum investment thus forgoes your opportunity of buying extra units at lower NAV. But according to me no can time market thus predicting that market is at peak or bottoms out cannot be ascertained. So it is best to invest in mutual funds through SIP.
Usually, an average investor would give all importance to return percentage in choosing mutual funds but there are few more important parameters which should be integrated with returns to choose best mutual fund scheme.
Parameters to Choose Best Mutual Fund Scheme
- SIP Returns: Number of times returns from the mutual fund exceeds returns from the index.
- Lump-Sum Returns: Number of times returns from the mutual fund exceeds returns from the index.
- Standard Deviation measures the deviation of the mutual fund return from the average. Lower the deviation; lower the volatility, which is good.
- Sharpe Ratio calculates the average of the return of the fund over and above the risk free return and standard deviation of the excess return. Higher the Sharpe ratio, better the performance of the fund.
- Sortino Ratio works similar to sharpe ratio but sortino ratio takes into account only the negative returns of the fund over and above the risk free return. Higher the Sortino Ratio, better the performance of the fund.
- Beta is the measurement of volatility of the fund from its benchmark index. A beta of 1 implies that fund movement is symmetry with the index movement. Lower the Beta, lower the risk which is good for fund.
- Alpha measures the ability of the fund manager in generating positive return wrt to risk free returns and index return. Higher the alpha, better the risk taking ability of the fund manager.
- R-Squared measures the correlation of NAV with its benchmark index. Similar to Beta, 1 implies a perfect correlation.
- Expense Ratio is the expense burden which is borne by the investor. Lower the expense ratio, higher the returns of the fund.
- Fund having Fund Manager associated with longer tenure is given preferences.
- Only top 15 recognized Fund Houses are considered while best selecting mutual fund scheme.
- Higher Net Assets (AUM) under the fund shows the confidence of the investors.
Best SIP Mutual Funds to Invest in 2016 in India
I have listed two mutual fund schemes under each category i.e. Large cap, Multi-Cap, Mid-Cap, Hybrid/Balanced Fund and ELSS/Tax-Savings Fund.
Large Cap Funds
Large Cap Funds simply means funds that invest more than 75% of their fund in large market capitalization stocks. Large cap funds offer stable and sustainable returns over a period of time. The two top mutual funds to invest in 2016 are:
- Birla Sun Life Frontline Equity Fund
- Franklin India Bluechip Fund
Multi Cap Funds
Mutli Cap funds aims to minimize risk by investing their funds into large cap, mid cap as well as small cap stocks. They are relatively less risky compared to a pure mid cap or a small cap fund and are suitable for not-so-aggressive investors. The two top mutual funds to invest in 2016 are:
- ICICI Prudential Value Discovery Fund
- Franklin India Prima Plus Fund
Mid Cap Funds
Mid cap funds target stocks with medium market capitalization. The returns offer by mid cap funds may surpass large cap funds as these funds possess high risk than large cap funds. The two top mutual funds to invest in 2016 are:
- SBI Magnum Global Fund
- Franklin India Prima Fund
Balanced Funds invests around 65% to 80% in equity securities and remaining 35% to 205% into debt securities. Thus, when the market booms exposure towards equity extended to the highest level to reap maximum benefit and vice-versa. The two top mutual funds to invest in 2016 are:
- Tata Balanced Fund
- SBI Magnum Balanced Fund
ELSS/Tax Savings Fund
ELSS Funds comes with major benefit of tax rebate under section 80C. Money invested in ELSS funds are eligible for deduction u/s 80C up to Rs.1,50,000 per financial year. The two top mutual funds to invest in 2016 are:
- ICICI Prudential Long Term Equity Fund (Tax Saving)
- Franklin India Taxshield Fund
One should invest in mutual fund under each category to balance his/her portfolio. Investing in more than one mutual fund under same category would tantamount to overlapping and results in increasing risk without increasing the return. Further, one should start investing in mutual funds with a mindset of minimum tenure of 3 years to reap good returns. In case there is a need of switching from one mutual fund scheme to another than consider STP (Systematic Transfer Plan) for switching.
I have enlisted top two mutual funds from each category but there may be contradictions because everyone has their own process of listing and destining which may very well differ.
Please Remember mutual fund investments are subject to market risks and there may be negative returns but one should not panic for negative returns and make decision based on short-term movements. Further, do consult your financial planner before making any investment decision.