Spotting winners

The virtues of investing in mutual funds are well espoused and something that this magazine has been stating for long.

After all, the working of mutual funds is so simple—you put money in a fund, which invests on your behalf, and you sit back and watch it grow. Although the structure of mutual funds is simple, investing in the right fund is not so simple. Selecting the best fund, which will work for you, from the universe of over 2,400 fund schemes, is a Herculean task.

For a moment, think of selecting the best mutual fund akin to having a buffet meal. Everything on the platter looks good and enticing. But, unless you are a glutton, you will focus on only a few things that suit your palate.

It is for this reason that foodies swear by A la carte, but they confidently do so because they are foodies and know pretty well what they want. But, not everyone is an expert and that is why we partnered with one to make the task easy for you.

To begin with, we partnered with Value Research to work out a manageable list of funds. For those unaware, Value Research is a specialist mutual fund tracker and considered the last word in mutual fund investing.

That said, what started as an easygoing discussion, soon turned into a debate on how we could come up with a list of funds that investors could safely invest in, without the fear of losing money? After all, there is 

no sure-shot technique to investing where one never loses money. But, given our belief that retail investors need to invest in equity mutual funds for the long-term and do so with some discipline, we set about putting a method to arriving at a list (Read: Methodology).

We must confess, Value Research was very accommodating in tolerating our demands to come up with this list.

Simplifying complexity

If you look up for mutual funds, you will find they have names like Bluechip, Value, Discovery, Opportunity and more. If you dwell a bit more, you will find phrases like large-cap, multi-cap, small-cap, contrarian, bottom-up and top-down. Some of you would recollect the advertisement where a coffee vendor keeps asking the buyer if he wants his coffee with or without sugar, followed by with or without milk, and so on. To ensure you do not have to wade through complexity, we have refrained from mentioning any such details.

We also introduced investor behaviour to arrive at this list. For instance, most small investors hate volatility. Actually, they wrongly equate volatility with risk and think volatility is risk. As such, they cannot stomach stock market gyrations. The result—they stay off investing in equity mutual funds for the wrong reasons. Just because someone is diabetic, does not mean they cannot have sweets at all. They can do so in moderation.

What you need to know is that risk and volatility are very different, and as investors, you should worry about investment risk of a fund, and not volatility. After all, equity fund managers thrive on volatility to build portfolios and generate wealth in the funds they manage. Also, volatility and risk are real and here to stay.

To address this concern, we looked for funds that manage their risk better by using the Value Research risk-adjusted returns parameter to select our list.

There is one more complexity to address when investing in mutual funds, i.e., in the way they function. For instance, although investors invest for the long run, fund managers have to manage short-term investor needs as well as market reactions. This is like managing a restaurant on a weekend, when the number of visitors increase, but the management has to cater to all. On this count, the role of fund managers is complicated, because they manage different types of money that comes their way, even in an equity-diversified fund.

To ensure that the fund you invest in performs stably, we looked into funds that have a fairly stable fund management team. There is continuity in the way a fund has been managed by the AMC over the long run. For instance, HDFC Prudence is managed by Prashant Jain since its inception two decades ago.

Meeting expectations

When it comes to eating out, the true test lies in the satisfaction one gets after the meal. In similar vein, investors in equity funds look for returns. Simply put, their investment should beat inflation and the returns from fixed income instruments. Our selection of funds have proven that they consistently manage to address this concern, without taking undue risks with investments. While there are phases in the 10-year span when the value of SIP investments would have dipped in some months, in the long-term, they do create wealth. 

A look at the performance of the 10 funds shortlisted stand testimony to why they are India’s best funds: over the 10-year span, a Rs 1,000 a month SIP in any of the funds, adding up to Rs 1.2 lakh is worth anywhere between Rs 2.75 lakh to Rs 3.95 lakh. Definitely, these are 10 funds which have all the necessary ingredients that most small investors seek to help them cope with volatility, manage anxiety and eventually build wealth.

The listing of these funds appears in alphabetical order for convenience, but they were shortlisted based on their risk adjusted return score. On that count, ICICI Prudential Discovery had the maximum risk adjusted score, while DSPBR Equity had the least. Without taking names, a few other funds, too, qualified this filtering process, but our discussions to keep the list to a manageable number kept them out.

In the following pages is the list of 10 best funds to invest, and we, as the captain, make up the final 11 of this complete team.

For a common investor, the verdict is clear—invest in any of these funds regularly through an SIP over the long run and you will laugh your way to the bank. For others wanting to know more, there is a brief description on what each of the fund schemes does in the subsequent pages.

Now that you have the list, go make that investment you have been wanting to and start enjoying your wealth creation meal.

 nk@outlookindia.com