Monday, October 19, 2009

Best Mutual Funds in India - 2009

Since I started writing this blog, all my posts have been about individual stocks and stock markets oriented information. But there are people who can’t invest in individual stocks due to resource constraints or who would not like to get involved in the stock market directly. Mutual Funds are an option for them and I will discuss in detail about the same.

What are Mutual Funds / Why Mutual Funds?

As we know, lot of retail investors enters into the stock market and only the ones who have the knowledge and skill come out with good returns and other people return not only empty handed but with huge burden due to lack of even some basic knowledge. Also there are people who can’t afford to buy individual stocks or invest anywhere else (Like land or gold) as their monthly savings is in meager amounts. They will have very low risk appetite and ideally they would want to invest in companies like State Bank of India, Reliance Industries, Infosys Technologies, BHEL and L&T but to buy a single stock in any of these companies, one would require about Rs. 2000 and not everyone can afford it. To address the above discussed problems, Mutual Funds originated way back during the start of the 20 th century in USA. Here is my definition of a Mutual Fund.

“Mutual Fund is a pool of money collected from investors and managed by a professional fund manager to invest in stocks, bonds and money market instruments and the net profit is shared among the unit holders or investors based on their proportion of investment”. The diagram below explains in simple terms.


So, Mutual Funds collect the money from investors and funds usually generate anywhere between 1 Crore to 10000 Crore Indian rupees and is professionally managed by fund managers who have the required knowledge in the stocks markets. These managers invest the pooled money mostly in stocks and bonds and based on the performance of the fund’s investment portfolio, unit price is decided on daily basis. Unlike stocks, small investors can even buy the units in fractions and they can redeem it anytime just like stocks. Hence, Mutual Funds offer small and unknowledgeable investors a chance to invest in the stock market indirectly and get benefited without knowing anything about it and more importantly they can invest any amount.


Advantages of Mutual Funds

Professional Management: This makes the life easier for people who does not have any knowledge in stock markets or who does not have enough time to do the research on their own.

Diversification: The funds invest in large number (30 – 100) of stocks thus minimizing the risk of losing the entire capital. The idea behind diversification is to invest in a large number of stocks so that a loss in any particular stock is minimized by gains in others.

Low Cost: Since the fund buys and sells in large amounts, the cost is spread out among all the investors which brings the per head transaction cost low.

Simplicity: Anyone can invest and any amount can be invested.

Liquidity: Can be redeemed at any time.


Disadvantages:

The same advantages which I listed above can turn out to be a disadvantage as well. For example, professional management is a very vague concept and many a times, people with common sense beat the fund managers in terms of returns as fund managers have to go through lot of regulations and sometimes they lack flexibility as well. So, performance of the fund managers is a key here and most of them are closely watched. Also, there might be hidden costs which investors should be careful about. Mutual Funds do not operate as a non profit organization and they are primarily in business to make money.

Stocks or Mutual Funds

The answer should vary depending on individuals. If you are someone who have the adequate knowledge in stock market and do not panic in tough times, then stock investment can be an option for you. But if you are someone who does not know what stock is all about and fear losing money, then individual stock is not for you and better go for Mutual Funds. Mutual Fund is good even for someone who has knowledge in stocks but do not have enough time to do research and buy stocks. Hence, Mutual Funds are an option for everyone irrespective of knowledge and skill but stock is for ONLY knowledgeable investors.

What returns one can expect?

Good Mutual Funds return compounded annual return of anywhere from 10% to 30% depending on the fund manager's performance. Some selective high performance funds report even more than that. For example, DSPBR Top 100 Equity Fund has returned 38% annually since its launch in 2003. HDFC Top 200 fund has returned 32% annually in the last 5 years. If you are someone who will be happy with an average return of about 20% without spending much of your time, then Mutual Funds can be an option.


HDFC Top 200 Fund Summary (Till June 2009)


Best Mutual Funds in India

Large Cap Funds: These funds invest only in blue chip companies and large corporations.

DSPBR Top 100 Equity Fund
HDFC Top 200 Fund
Franklin India Blue Chip Fund
HSBC Equity Fund
Sundaram BNP Paribus Select Focus
Birla Sunlife Top 100 Fund
Kotak 30

Diversified Equity Funds: Money is invested in all the companies based on the growth opportunity irrespective of the size of the company.

Birla Sunlife Frontline Equity Fund
DSP BlockRock Equity Fund and DSPBR T.I.G.E.R Fund
Templeton India Growth Fund
Reliance Growth Fund
SBI Magnum Contra Fund
Fidelity Equity Fund
HDFC Equity Fund

Small and Mid Cap Funds: Money is invested in small and medium sized companies.

Sundaram BNP Paribus SMILE Fund
Birla Sunlife Midcap Fund
Sundaram BNP Paribus Select Midcap Fund
Franklin India Prima Fund
DSP BlockRock Small and Midcap Fund
Reliance Regular Savings Fund
Tata Growth Fund or Tata Midcap Fund

Kumaran Seenivasan

www.stockanalysisonline.com

8 comments:

Faisal Humayun October 20, 2009 at 2:20 PM  

A really nice article as always from your end....:).

Besides the funds you mentioned, I would also like to add fund of funds...There are several fund of funds in India which give exposure to global energy stocks and also to stocks in China...So these might also be worth considering if anyone is looking for more diversity of funds...

Besides this, i think you have mentioned the best of funds...

Kumaran October 20, 2009 at 6:41 PM  

Faisal,

Thanks for your comments and also for including the fund of funds(FoF)option for readers. Again we might need to explain for people what is FoF as many might not know about it.

-Kumaran.

Shabu's October 24, 2009 at 2:16 AM  

Excellent! dear Kumaran,

It is one of the most simple, compact and worthy article I ever read on MFs.

Most of the funds you recommended are gems, Whats your opinion about Reliance Diversified Power Sector fund and DSPBR World Gold Fund.

I think a good percentage of our Fund managers are youngsters with less experience in the market. They are real scholars by theoratical angle as well as holding several degrees with their names. But handling of public's hard earned money should be in safe and experienced hands. I am saying this in the wake of foolish practices by some of them in the recent past.

regards
Shabu

Kumaran October 24, 2009 at 9:57 AM  

Shabu,

Thanks for your comments. Both the funds you have mentioned are great funds particularly the Reliance Diversified Power Sector Fund. They have got great track record and is in a high growth sector. But since being a theme fund, I was bit skeptical to list. May be I should have included a theme fund category.

-Kumaran.

romlya March 3, 2010 at 11:53 AM  

Hi Kumaran,

you recommend Birla sunlife frontline equity, is it Plan A or Plan B, also what are you thoughts on Sundaram SMILE fund and reliance diversified power sector fund.
waiting for your thoughts.

Thanks,
Romel

Kumaran March 3, 2010 at 3:30 PM  

Hi Romel,

Birla Sunlife Frontline Equity Growth fund is the one I referred. The other twi funds are good but I would recommend to go with Sundaram Select Midcap and Birla Midcap if you are thinking about midcap funds.

-Kumaran.

Anonymous,  March 5, 2010 at 10:40 PM  

Nice Article. As newbee to investment world I was looking for something like this. Thanks!

Anonymous,  December 24, 2010 at 5:58 AM  

Great site. A lot of useful information here. I’m sending it to some friends!

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