Top 4 Best Mutual Funds SIP to Invest in 2018

2017 will go down in history as a landmark year for the Mutual Fund industry in India. Total assets zoomed past the 20 Lakh Crore (20 Trillion Mark), effectively doubling within just three years. The total SIP (Systematic Investment Plan) industry book soared past the Rs. 5,000 Crore mark. What this essentially means is that there would be inflows of more than 60,000 Crores from SIP’s alone in 2018, and this bodes very well for the industry, overall.

With inflation being reigned in effectively, the RBI kept benchmark rates low – and these in turn translated into lower lending rates from banks. As a caveat, returns from fixed income instruments such as deposits, bonds and postal schemes took a hit. Low returns from traditional instruments lent a further fillip to Mutual Funds, with a large number of first time investors signing up. AMFI’s ubiquitous “Mutual Funds Sahi Hai” has played its role in driving penetration as well.

On the fixed income side, yields traded in a tight range of 6.4% to 6.9% for most of the year, limiting growth prospect for duration funds. At FinEdge, we had anticipated this, and had been recommending accrual based debt mutual funds from the start of the year over longer duration funds such as GILT funds.

With under two months remaining in 2017, first timers and seasoned Mutual Fund investors alike should be revisiting their investment strategies for the next year. Here are a few pointers in the right direction.

2018 – the year of asset allocation

With a multitude of push and pull factors in play, 2018 promises to reward those who follow a tightly managed asset allocation, while punishing those who aim to time market entries to the T. There are signs pointing to a recovery in earnings (increasing capacity utilisation and credit offtake, to name a couple), but the short term disruptive effect of the GST implementation may continue to impact earnings for another couple of quarters. Additionally, markets will continue to react to global news flows, such as rate calls by the U.S Fed, or developments on the North Korea front. The aging U.S Bull Market poses concerns as well, as it would be foolish to assume that India will be completely insulated from global shocks, if they were to materialise.

In such a scenario, investors who sit on the side lines indefinitely waiting for the promised deep correction may never end up investing, as the correction that comes may well be a time correction instead of a price correction. The winning approach for 2018 would be to invest in a top down manner, first arriving at your optimal asset allocation based on a risk-profiling quiz, and then selecting funds to match your plan.

Risk taking investors may adopt a 70:30 Asset Allocation in favour of equities, while moderate risk takers could split their investments equally between equity and debt mutual funds. Conservative investors should invest no more than 20% of their portfolios into equity mutual funds in 2018.

Equities – stagger your entries

At a Price to Earnings ratio of 26X (current earnings) as on date, the broad stock markets are not cheap by any standards. In fact, equity markets may be pricing in a steep recovery in earnings in 2018. Given that corrections may be forthcoming if the growth in earnings is delayed beyond expectations, Mutual Fund investors should not be in a hurry to invest lump sums in 2018.

Regular savers should start SIP’s in Bluechip Equity funds in 2018. Those with high risk tolerances and goals that are very long term (say, one’s retirement) may consider investing into mid cap funds as well, but with a background awareness of the risks involved.

Those with lump sums to invest should be wary of succumbing to the “FOMO” or “Fear of Missing Out” syndrome and jumping in with both feet. It would be wiser to break up the investment surplus into six or twelve parts, and stagger them into the target equity mutual fund scheme via STP‘s (Systematic Transfer Plans) instead.

Debt – temper your expectations

With the RBI not signalling any deep rate cuts in the repo rate in the near term, bond yields will likely be influenced by global news flows and incoming inflation data prints. Rising crude, coupled with speculation regarding the stimulus package are likely to keep yields range bound in the 7% zone, with an upward trajectory. In case you’re wondering - rising yields are not good for debt markets.

In such a situation, debt fund investors need to do two things. One, they must continue to focus on accrual based or ‘Income’ mutual funds, meaning that the debt mutual funds they invest into must have a low to moderate duration, while maintaining a healthy balance of yield and creditworthiness. Two, they must temper their expectations. 2018 is unlikely to be a year when debt funds provide double digit returns. A good target return figure from debt funds in 2018 would be in the range of 8% to 8.5%.

Factors to consider while choosing a Mutual Fund

New investors tend to focus on two things while selecting a Mutual Fund – star ratings on mutual fund ranking and information websites, and short-term past returns. Both are fallacious selection criteria. One-year returns may have been the result of one or two bets that paid off; and if you’re unlucky, you may find yourself at the receiving end when the cycles reverse. Star ratings have limited credibility, and they change on short notice often, leaving investors second guessing their decisions and dithering in confusion. When selecting a Mutual Fund, we prefer considering factors such as long-term track records, performances during difficult markets, fund manager pedigree and vintage, and adherence to label, to name a few.

Four Mutual Funds to Consider in 2018

Based on our evaluation of the outlook for 2018, here are three mutual funds for you to consider investing into next year.

Large Cap Equity: DSP BlackRock Focus 25

As the name suggests, DSP BlackRock Focus 25 fund maintains a compact portfolio of 25-30 large cap stocks. The fund doesn’t favour any particular sector, and follows a bottom up approach to portfolio creation. It tends to follow a buy and hold approach, and therefore has a low portfolio turnover rate/ As we are now in the eighth year of an aging bull market that began in 2009, over-diversified “spray and pray” funds will fund it difficult to generate outperformance. This fund’s compact, focused portfolio will hold it in good stead in such a scenario.

Diversified Equity: SBI Magnum Multi Cap

With a 5-year return exceeding 21% CAGR, SBI Magnum Multi Cap is a consistent outperformer in the diversified equity space. Unlike other diversified funds that tend to be more rigid with their allocation percentages across different market caps, SBI Magnum Multi Cap tends to be more fluid in this regard, and actively manages its market cap allocation. This makes the fund more “opportunistic” in the sense that it’ll be better positioned to capitalise on corrections in a certain segment of the market. The fund avoids speculative calls, and has favoured quality compounders in the past.

Hybrid: ICICI Prudential Balanced Advantage Fund

ICICI Prudential Balanced Advantage Fund is a “Dynamic Asset Allocation Fund” that rebalances its split between equity and debt daily, based on an in-house indicator that’s derived from the Price to Book Value Ratio (P/BV) of the NIFTY. This flexible asset allocation strategy makes it an ideal choice for late entrants who are looking to generate double digit returns over the long run, but are unwilling to take on an inordinate amount of risk.

Debt: Franklin India Low Duration Fund

Franklin India Low Duration Fund has been a stand out performer this year, with 12 month returns of 9.09% as on date (8^th November 2017). The fund’s low modified duration of 1.56 years positions it well, given the current yield scenario discussed above. The fund has a relatively high YTM of 8.74%, though it has a fairly high allocation of nearly 60% to AA, AAA and A1+ rated papers. Franklin Templeton’s strong fixed income research desk capabilities means that credit risks are well managed. In fact, allocations to most papers are sub-3%. Franklin India Low Duration Fund is an ideal choice for low risk takers or short-term investors in 2018.

Would you like to get a head start with your Mutual Fund investments in 2018? Visit www.finedge.in and click “Get Expert Advice” to leave your details for a call back from our Financial Planning experts. Here’s wishing you a fantastic investing experience in 2018!