[Last Updated: October 2016]
It is always confusing to predict which are the best money market funds?
And do you think, mutual funds can be your best friends in wealth building?
Why not, because there are these huge terms that everyone is talking about in the market…
… best growth mutual funds!
… top performing mutual funds!
… best mutual funds for long term!
But the problem is you actually don’t know which mutual funds are right for you. Because there are so many mutual funds with the same prefix.
I totally empathize with you because that is my problem too. Finding the right mutual fund is just not an easy task. It is actually bewildering.
(If you are new to mutual funds, it will be much harder for you to decide how to invest in a mutual fund as a beginner. But don’t worry, I will explain with analogies so that everyone can relate with it).
For a fact, there are 300 mutual fund schemes in the market that invest in stocks.
Strategy to Invest in Mutual Funds
#1. Find Trust Worthy Friend
How will you choose the best mutual funds for your portfolio…
… that will help you meet your goals?
Ok! Enough questions. It is really difficult. But we can make it easy. How?
Let’s take a different, ‘friendly’ approach.
There are close to 300 mutual fund schemes, probably also the number of friends on your Facebook account. ☺
(You got it right, I will take your facebook friends as the analogy)
But are all these 300 your true friends? I don’t think so. I am sure neither do you feel so.
True friends are only a few, but the best ones.
So, the question that you need to ask is “who would be your true friends?”
- Someone who understands you as a person;
- Someone who shares your interests;
- Someone who is there when you need him;
- Someone who stands by you through good and bad times;
- Someone who pushes you to meet your goals;
- Someone who does not take your advantage; and,
- Someone who you can trust and count on;
Based on these parameters, even true friends will be difficult to find. Not true. You do have true friends whom, you can truly count on.
#2. Apply Analogy to Mutual Funds
Out of the 300 odd mutual fund schemes, how do we find the ‘true friends’, the schemes that you can count on to help you build your wealth?
Well, in the case of mutual funds, the true friend approach would translate to something like this:
- The MF which is trustworthy and consistent in its approach and does what it says.
- The MF which doesn’t put your money to unnecessary risk and takes care of your money like its own.
- The MF which is transparent in the dealings and discloses all relevant information and facts.
- The MF which alerts you if anything is going wrong and assures you that we will overcome the difficulty
- The MF which has your interest in its mind and works hard to help you fulfill your goals
Are you with till now? (Please do let me know in comments if not).
Let’s make it more specific now.
#3. Find the Best Mutual Funds
… which are your true friends!!
We will do a little exercise here to select the best mutual funds that channelise your savings with the intent to grow them without taking unreasonable risk.
The key filters that we will apply to select the mutual funds are:
- Diversified equity funds only and not funds that invest in a particular sector or theme. Diversification ensures that you get to benefit from a wide range of investment choice. Sector and themes are concentrated since they narrow their investment choices and hence become riskier than the diversified funds.
- Fund size: Funds with less than Rs. 100 crores in size have also been excluded. Smaller funds can find it difficult to navigate stock market turmoil.
- Fund age: Experience matters. Any fund that was less than 3 years old has not been taken into consideration.
- Expense ratios: From an investing point of view, costs are important. That is in fact, the only thing that you can really control. I have eliminated all funds that had an expense ratio of over 2.5%.
- Turnover: This is a measure of how many times the fund buys and sells the stocks in its portfolio. Too much of this activity adds to the cost and is an indicator that the fund manager is not sure of his/her own strategy. Hence, funds with more than 100% turnover have been excluded.
- No Index Funds: For the purpose of simplification, I have not included the Index Funds as they represent a passive investment strategy and not an actively managed one. They are a different breed.
As you can see, I am not using ‘returns’ as a criterion. You may wonder why? The fact is that returns are a result and not the means. We need to focus on factors that can deliver returns.
(I can further clarify this point if you want)
#4. Further Filter Mutual Funds List
So, I downloaded data on equity mutual funds from Valueresearchonline. The data is as on October 15, 2015.
I started with 246 funds (only open-ended). After applying the above filters, I finally was left with 50 funds. That’s still a very large number.
Now from these 50 funds, we cut down further.
Since, risk is also a focus area, we will only take funds, which have more investments towards large companies such as Infosys, HDFC, etc.
This led to removal of 21 more funds. We are now left with 29 funds. I realize that there are multiple funds from the same fund house. No point.
Let’s zero down on one best from each. The filter that I have used is a combination of Expense ratio, Risk ratio (Standard deviation) and Risk reward ratio (Sharpe ratio) in that order.
With that, we now arrive at a final list of 13 ‘friendly’ funds, which you can refer to invest and build your wealth.
#5. Final List of Best Mutual Funds in India
In case you are interested in knowing the past returns, here it is:
#6. Invest in Mutual Funds
Great friendships have one big characteristic – they stand the test of time.
Similarly, in case of investing in stocks or mutual fund, patience can be the biggest differentiator between making a million and going broke.
Simply put, with mutual funds, you have to ready to withstand short-term variations, sometimes even loss of value. Basically, if you invest Rs. 1 lac, then in the short-term, it can go down to Rs. 50,000, even Rs. 30,000. You have to be prepared mentally to live through the phase.
Having said that, it’s also my duty to bring to your notice the standard disclaimer. Mutual fund investments are subject to market risk. Past performance may or may be sustained in the future.
I believe though that over the next 10 years, you would generate a return that would beat inflation easily and hence grow your wealth substantially.
The list of friends, I mean, the funds is all yours. Now it is your turn to put your money to work.
Tell me how you are planning to do it!
A note of caution: You should consult your investment advisor to understand if these mutual funds are right for your needs, risk capacity and investment horizon.
You can download the excel sheet Mutual Funds.
Vipin writes about simple and actionable ideas on personal finance, money and investments including mutual funds on his blog www.vipinkhandelwal.com. His focus is to empower the investor to be able to make decisions for himself. He has personally advised hundreds of investors on building their investment portfolios and financial planning.