Top 10 Mutual Funds For SIP: Don’t Ask Alexa Or Google

“Alexa, which are the top 10 mutual funds for SIP?” one may ask the ‘Smart’ voice assistant.

Or, if you prefer other brands of digital assistants, how about trying “Hey Google, which are the best mutual funds for SIP?”

This will probably be the latest way to search for the best mutual funds. Though I’ve not tried it, it will be interesting to hear their reply.

(P.S. If you have these artificial intelligence powered devices at home, do try it out and share their reply)

But will Google or Alexa be able to sift the wheat from the chaff? I won’t be surprised if they both list different sets of mutual funds, adding to your dilemma.

A  Google search for the ‘Top mutual funds for SIP’ usually leads to nearly 8 million results. Of course Google adopts its own algorithm to rank pages, but is the code intelligent enough to provide you with authentic resources?

Is it astute enough to differentiate between unbiased or biased advice?

To the disappointment of many, the answer is NO.

Forget Google or Alexa, even you would find it difficult to identify whether a list of the top mutual funds is truly reliable.

Mutual fund distributors earn a commission from selling schemes to you. Thus, some may promote high commission paying schemes as top mutual funds for their own interest and not yours.

If you’ve never realized it, this is one of the reasons why ‘mutual fund tips’ so to say, are available for FREE.

You would agree, to select the best mutual funds, it is necessary to have access to data of the scheme since its inception. You would need to check how the scheme has performed over multiple periods. However, customized data is not freely available.

You will need access to a mutual fund database or Mutual fund research tools. Such tools to analyze mutual funds cost lakhs of rupees annually. Yes! The cost is huge for the average retail investor.

And if anyone had access to such technology and conducted an in-depth research of the funds they are recommending, the advice would not come free.

So before you take action on a list of the best mutual funds freely available on the world wide web, these Five questions will help you make the right decision.

1. Is the advice free from any bias?

2. Are the recommendations backed by sound research?

3. Is the person/company giving the advice authentic and reliable?

4. Do they have a verifiable track record of picking the top mutual funds in the past?

5. Can you hold the person/company accountable if they had suggested an unsuitable investment?

Wish you all the best to find such a resource for free. In my experience over seven years as a mutual fund analyst, it is extremely rare to find free genuine advice that ticks all the boxes above. There are, however, a handful of resources that provide unbiased advice on mutual funds at a small cost.

It would make good sense to pay that small fee, than seeing your wealth eroding due to bad advice.

If you have the time and want to save yourself some costs, doing your own research works. Let's take a look at what it takes to select the best mutual fund to invest via a SIP or otherwise.

How to pick the top mutual funds for SIP?

Well, no magic crystal ball can foretell which mutual fund schemes will top the list over the next decade. However, through experience, one develops a process to shortlist the potentially best mutual fund schemes for the future.

There are various aspects within a mutual fund scheme vital for investors to analyse before investing. These are:

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: 

• Performance: The past performance of a fund is important. But, remember that past performance is not everything. It may or may not be sustainable and should not be used as a basis for comparison with other investments. 

  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.  

  2. Time period: It is important to evaluate the long-term performance of funds across multiple periods, preferably in the form of rolling returns. 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.  

  3. Risk:  In non-financial terms, risk is referred to as the loss of life or property. In finance, though risk has a more complex definition, it can be easily termed as the loss of capital. But, that is the ultimate financial risk. Risk is normally measured by Standard Deviation (SD) and signifies the volatility the fund has exposed its investors to.

  4. Risk-adjusted return: As a practice, most analysts use the Sharpe Ratio to measure risk-adjusted returns. 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.

  5. 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.

  6. 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. This indicates that compensation to the investors could be inadequate for the level of risk taken.

• 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.

• Costs: If two funds are similar in most contexts, it might not be worth buying mutual fund schemes that have high costs associated with it. Simply put, there is no reason for an AMC to incur higher costs, other than its desire to have higher margins. Annual expenses involved in running the mutual fund include administrative costs, management salary, overheads, etc. The Expense Ratio is the percentage of assets that go towards these expenses. Direct Plans exclude distribution costs, hence, a cheaper alternative to Regular Plans.  

Do watch this short video on how to pick winning mutual funds.

Putting all your eggs in one basket can prove perilous. Hence, there is a need to diversify the investment over a set of schemes with the capability to deliver superior risk-adjusted returns after having dealt with the market conditions tactfully.

Therefore, instead of chasing top performing mutual funds or the mutual funds 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.

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.

Also read:

How To Pick The Best Mutual Funds For SIPs in 2018

Best Mutual Funds to Invest In 2018? Read This First!

Which Mutual Funds To Invest In Via SIP, For Long Term Financial Wellbeing?

Should You Opt For Daily SIPs In Mutual Funds? Know Here…

Why You Need To Build A SIP-Worthy Mutual Fund Portfolio

Author: Jason Monteiro

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