Saturday, 11 May 2019

Best Mutual Fund for Wealth Creation

Dear investors & friends,

Hope you are all doing great. It's been a long time and today I decided to share my thoughts regarding an important question which I received from multiple friends over email in the past year.


Firstly, I am overjoyed that many of you are on the path of Financial Independence. To create wealth, believing in the process is important. Beginning to invest is important.

Now, practically, not everyone has the time to understand businesses. Hence Mutual Funds play an important role in this journey. 





Interestingly, I received an email from one of my readers (let us call her Kiran) last week. Kiran mentioned that she is paying an adviser to deploy her SIP every month in a Mutual Fund. She has dedicated Rs 30000 every month for SIP. The adviser chooses a Mutual Fund every month and takes a fixed fee for this service. Of course, the adviser would have own methods of choosing best fund every month. This email got me thinking. I thought I should write on this topic.

Now, before we proceed further, I request you to spend ten minutes reading this article:


Click here -> Wealth Creation with Mutual Funds


If you have decided to skip above article, then I am assuming that you understand Mutual Funds well and need no explanation.


In the above article, I have, in detail explained a few concepts regarding Mutual Funds.  


Now, if you have decided to start a Systematic Investment Plan in Mutual Funds, the million dollar question is - "Which is the Best Mutual Fund for Wealth Creation?". Everyone has this question. Everyone wants to make the best returns. No one wants to choose a wrong fund.


Let us take a look at some facts here (as of May 2019)

Disclosure - The information below is taken from Moneycontrol. I have only taken Direct Plans. All returns are SIP returns (not Lumpsum returns) because I believe in Wealth Creation by adding every month. SIP Returns are Absolute Returns since small amount is added every month. 


I DO NOT RECOMMEND ANY OF THESE FUNDS. BEFORE MAKING ANY CONCLUSIONS, PLEASE DO OWN HOMEWORK.


All of you readers know me well enough. Do not miss my message by debating on the Figures & Fund Names. Message is important. I repeat. Message is key here.


With this disclosure, let me go ahead.


Here are the Top 10 Large Cap Mutual Funds (SIP Returns) - 1 Year, 2 Year, 3 Year & 5 Year Absolute Returns







Let us pause. Now, I have put this information in a single table. Let us observe:



Few observations:


- 1st position fund in 1 year returns is at 4th Position in 5 year returns.

- 3rd position fund in 1 year returns is at 1st position in 5 year returns.
- 9th position fund in 1 year returns is at 5th position in 5 year returns.

You will observe that Performance Order of Funds keep changing based on the horizon you have taken.

If we plot the 10 year, 12 year & 15 year absolute returns, you will see similar observations. It will be really surprising.

Since I have compared Large Cap Funds to each other, you may do the same with Midcap funds. Smallcap funds. Multicap funds. etc...

Here is a small snapshot of Small Cap Funds (1 year, 2 year, 3 year & 5 year absolute returns)


- 2nd position fund in 1 year returns is at 8th Position in 5 year returns.
- 7th position fund in 1 year returns is at 2nd Position in 5 year returns.

Now, let us pause for a moment & think. 

Which is the Best Mutual Fund for Wealth Creation? How can we decide? Is there a sureshot answer for this question?

Hmmm.. Are you getting a new perspective? Pause. Think.

Here are my thoughts and of course, these are just my thoughts (we can agree to disagree):

- Do not compare funds across categories. There is no point in comparing a large cap fund vs diversified fund vs small cap fund. 

- Small cap funds might be highest risk & highest volatility in returns. Diversified funds might be conservative returns. So, choose a category which meets your comfort level & horizon.

- Most of the funds in a particular category perform well over time. They are managed by professional fund managers who have good stock picking abilities.

- Most of the funds hold good, liquid, quality businesses in that category with good track record. Sometimes, we will find many common companies across funds in a category. If we look at Large Cap funds, many of them will have same companies. Of course, weight of the stocks, mix, buy price and sell frequency differs.

- As we have seen in above examples, if a fund is highest performer in 1 year, it doesn't necessarily mean that it will remain at top position in 5 years, 10 years, 15 years time-frame. Also, a bad performer in 1 or 3 years, can be top performer in 15 years time.

- By looking at past data, we definitely cannot predict what returns the fund is going to give us over time. But past data definitely indicates which funds are consistent in their performance. But, this can again, can & will change over time.

- I see that over longer periods, well managed funds have achieved good returns.

My good friend, Dhruv Girdhar has written a spectacular article on this topic. I suggest you read the same. You will get an amazing perspective with some facts.


Another friend, Prasad Shete, had mentioned to me that his sister was looking for suggestions on how to evaluate mutual funds.

I found his reply to her, pretty interesting.

Click here to read - Letter from Prasad to sister on how to evaluate Mutual Funds - An Interesting Perspective

So, what would I suggest? Here are my suggestions:

- Do not break your head too much.
- Stock Market is a wonderful place if we want to beat inflation & compound money well.
- Greed has no Place in the Stock Market. The Greedy Perish over time.
- Do not keep Changing the funds every month. Remember, based on Return, Positions of Funds keep changing.
- You would do better-off if you choose one fund from 2-3 categories & SIP for 10 - 15 years.
- The amount of money you allocate every month is under your control. Be aggressive in investing.
- If your fund has given lesser returns after 1-3 year of SIP, celebrate. Maybe in 10 years, it could give super returns. Keep the faith. Keep going.
- If your fund has given bumper returns after 1-3 year of SIP, celebrate. Keep the faith. Keep going.
- Mutual funds advertisements will always choose the best returns when they project themselves. Some will market themselves as best 1 year returns (even though they have under performed in 10 years). Some will market themselves as best 15 year returns (even though they might have under performed in 3-5 years).
- Aim to beat inflation or index over period of 10 - 15 years. You will not be disappointed.
- No matter what happens, do not stop. Be consistent. Keep the faith. Keep going.

So, do you really need an adviser? Maybe you still do. Maybe you don't. 

But you can do a little homework and begin today...

Think about it. I leave you with these thoughts friends.

All the very best...

Please leave your comments below on this topic.

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Good luck,
Fundamental Investor

11 comments:

  1. Thanks a lot👌👌👌

    ReplyDelete
  2. Wonderfully written FI.. loved the way you make your readers pause and think..

    Thanks for the insights on MF.. helpful ����

    ReplyDelete
  3. Best free advise I ever got. Thanks

    ReplyDelete
  4. Being an investor and a #Financialadvisor I could relate to many things that you have written. Then all advisors are not good enough, in the same breath, all investors are not wealth creation minded. In both cases, following popular news and shortcuts kills both of them.
    Antony Trackfinder
    Trackfinder Financial Consultancy

    ReplyDelete
  5. Nice artical.

    Have one doubt- let's assumeaIone has invested in SBI bluechip and 5yrs return compare to mirae is almost 12% and there are more than 50 funds in each category and If someone is stuck with fund which is not in top 10 after 10 year...so my question is should we take at least 2 fund from each category?

    But again many ppl says don't take too many fund? In my above case what do you suggest?

    ReplyDelete
  6. Dear sir. Some things are not in our hand. Always best to choose funds which have been consistent over the 2 - 5 - 10 year horizons. There are funds which meet this criteria. And then, keep investing for a long time. I think one fund per category (max 2 - 3 categories) should do the magic in long run. This is my view.

    ReplyDelete
  7. Useful Information, your blog is sharing unique information....
    Thanks for sharing!!!stock tips

    ReplyDelete

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