The best funds to SIP on

After hurtling downwards for much of 2013, the markets have been climbing up in the past year. Similarly, a despondent 2011 was succeeded by a wild dash in 2012. Clearly, volatility seems to be the name of the game.

Systematic investment plans, where you invest a fixed sum every month (or periodically) in a set of mutual funds, work well to even out this volatility and give you better returns to boot.

Here’s putting it in numbers. From September 2009 to date — that is, in the last five years — the Sensex and Nifty have returned 9.9 per cent annually. The broader market gauge, the CNX 500, has also given out a 9.8 per cent annual return in five years. But had you run a systematic investment plan (SIP) in even a simple Nifty index fund, you would have got at least 14 per cent in annual returns.

With a yo-yoing market set to continue for some time yet, SIPs are the best bet to build up a good corpus, provided investments are made with a horizon of at least four to five years. So, which equity mutual funds are the most suited for SIPs? Here are the answers.

Splitting the fund universe into categories — large-cap oriented, the mid- and small-caps, and those that change their market-cap orientation depending on market mood — makes it easier to zero in on the best funds. For all SIP investments, it is necessary to carry on with them for at least five years to actually reap real benefits.

Take large-cap funds first. The up-and-down five-year period from 2009 to now offers enough scope for judging SIP returns.

The average return from a monthly SIP from end-September 2009 to August 2014 is 16.9 per cent. The average point-to-point return from September 2009 to date is around 12.1 per cent for these funds.

HDFC Equity, Franklin Prima Plus, Birla Sun Life Top 100, BNP Paribas Equity, UTI Equity, ICICI Pru Top 100, ICICI Pru Focused Bluechip, SBI Magnum Multiplier and UTI Opportunities have been the best schemes for SIPs.

These funds, with their moderate risk profile, can form part of your core investment portfolio. All these funds have clocked returns of over 19 per cent in a five-year SIP. They also score on consistency in terms of returns. In the past five years, all the above funds have beaten their respective benchmarks 70 to 85 per cent of the time on an annual rolling return basis. Across market cycles as well, these funds have usually been in the top quartile of performance.

Apart from these, there are a few funds which have earned better returns through SIPs than the lumpsum route, as they have more ups and downs in performance, allowing you to better average out costs. Reliance Vision and Principal Growth work on these lines, with SIP returns six percentage points better than their point-to-point returns.

At the bottom of the SIP return pile, and therefore to be avoided, are IDFC Imperial Equity, Sundaram Growth, HDFC Large Cap and Sundaram Select Focus, with annual returns of 10 to 13 per cent. Even a lumpsum investment in these schemes has not grown at an impressive pace.

For mid- and small-cap funds, a wide gap of six or more percentage points between SIP and point-to-point returns is the norm. SIPs, at times, even beat lumpsum investments by 10 percentage points.

The mid-and-small cap indices lost steam in 2011. In 2012, they soared, with their valuations zooming past the large-caps. They crashed again from late 2012 onwards, well into 2013. But in this latest rally, they are the front-runners, with several stocks doubling and tripling in one year.

Such movement becomes a boon for SIPs. Average lumpsum returns of funds that primarily invested in mid- and small-cap stocks from end-September 2009 were 17.7 per cent. The average monthly SIP return in this period is 24.3 per cent.

Franklin India Smaller Companies is head and shoulders above the rest of the crowd with returns of 30.6 per cent when using a SIP. The fund’s point-to-point return is 23 per cent. The funds that follow Franklin Smaller Companies over the long term are as follows: Canara Robeco Emerging Equities, ICICI Pru Value Discovery, BNP Paribas Midcap, HDFC Mid-cap Opportunities, Franklin Prima, Religare Invesco Mid N Smallcap and ICICI Pru Mid-cap. These funds delivered returns between 26 and 30 per cent through SIPs. Returns are 4 to 9 percentage points better than their point-to-point five-year returns.

These eight funds can be used to inject the party mood into your portfolio. Mid- and small-cap stocks deliver much higher returns than bluechips, especially since they can double in prices which large-caps normally cannot manage. But they do involve much higher risk.

The funds mentioned above put most of their portfolio into mid-cap stocks (those with market capitalisations of ₹2,500 to ₹8,000 crore). Some small-cap stocks are included from time to time. Their investment style is on the conservative side, which tempers the risk involved a little. They don’t go overboard on stocks and sectors that are the flavour of the market. Longer-term views on stocks, focus on quality, and attention to valuations set these funds apart from the others in the category.

These funds should be add-ons to your portfolio that boost overall returns — i.e., invest smaller amounts in mid-cap funds than you would in large-cap funds. And here too, staying invested for longer periods yields better results.

For those who can take on even higher risk, consider DSP BR Micro-cap, another cracker of a fund. It has delivered 30 per cent in five years through SIPs. This fund is one of the few wholly dedicated to small-cap stocks.

Funds that have fared poorly compared with peers in the mid-cap space are HSBC Progressive Themes, Escorts Growth, Sundaram Equity Multiplier and HDFC Small and Midcap, with returns almost half the leaders’, at 14 to 18 per cent. Investment in these schemes need not be considered.

Then there are funds that alter their market capitalisation tilt depending on the circumstances, called multi-cap funds. The SIP effect is just as pronounced here. Average SIP return at 18.3 per cent is well above the point-to-point return of 13 per cent.

Reliance Equity Opportunities, Mirae Asset India Opportunities, Tata Equity PE and Franklin India Flexicap are the good funds in the multi-cap category that deliver well on SIP basis. These funds have yielded 19 to 25 per cent in returns in the past five years, 4 to 7 percentage points better than the point-to-point returns.

BNP Paribas Dividend Yield is another fund that scores on the SIP front, delivering a 19.8 per cent return over five years, and involves relatively lower risk to boot. That is because dividend yield funds pick stocks that offer good dividends and stable profits. These funds can be used as diversifiers in your portfolio, akin to mid-cap funds.

For L&T India Special Situations as well, SIP is the way to go. The fund’s strategy of investing in stocks which are undervalued, being off the market radar, involved in mergers, turnarounds or takeovers gels well with the SIP concept. In the past five years, a monthly SIP would have delivered returns of 19 per cent. A one-time investment five years ago would have netted just 15.6 per cent.

What if you quail at the mention of risk but still want that extra return? Index funds and exchange traded funds (ETF) that are tagged to a particular index are the way to go then. All you will be taking on is pure market risk. Index funds can also form part of your core portfolio.

Sensex and Nifty-based funds have delivered about 14 per cent in the past five years on SIP basis. The Nifty itself has given an annual 9.9 per cent return. Funds from the Quantum, ICICI and HDFC stables have given the best SIP returns.

Goldman Sachs Mutual Fund has a larger array of such passive funds — both the CNX 500 and the Nifty Junior index can be bought only through this fund house. The five-year SIP return of the CNX 500 funds is 13.7 per cent, compared with 8.7 per cent on a point-to-point basis. The Nifty Junior index fund has delivered 16 per cent in the past five years though SIP.

While it’s all well and good to have a long-term time frame and to maintain a systematic plan for a number of years, don’t completely kick back and forget about it.

A look at a fund’s performance at least twice a year, and comparing it to both peers and the benchmark is needed.

A prolonged poor performance, for a year or more or over multiple market cycles, will be the cue to stop your systematic investment in that fund.

Don’t spread your investments thin across a whole bunch of funds either. While there are plenty of funds mentioned above, narrow it down. Refer to the table for a guideline on which ones to go for. Investing in several funds from the same fund house also steps up the risk you are taking on.

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