Recommended equity mutual fund portfolios for SIP investors

Finding the right mutual fund schemes to invest is one of the major hurdles faced by many investors. In fact, many Systematic Investment Plans (SIPs) fail to take off because of this reason. To be fair, it is indeed a tough task for a regular investor to sift through hundreds of schemes to choose the winners that would help you to meet their future financial goals. Questions abound: should you look at past performance? Should you look for consistency? Should you look at the pedigree or expense ratio?

Here is an easy way out. ET.com Mutual Funds has created a host of equity mutual fund portfolios, based on the risk profile of the investor and SIP amount, to help you with your investments. We have considered three risk profiles - aggressive, moderate and conservative - and picked suitable mutual fund schemes for each profile. We have also created portfolios for three different SIP baskets: Rs 2,000-5,000, Rs 5,000-10,000 and above Rs 10,000.

We have only considered equity diversified and equity-oriented balanced funds for the purpose of recommendation. We have also assumed that the investor is investing with an investment horizon of five years.

We will continue to monitor the performance our recommendations and suggest changes or modification in the portfolio as and when the need arises.


Methodology

ET.com Mutual Funds has employed the following parameters for shortlisting the mutual fund schemes.
1. Mean rolling returns: rolled daily for the last three years
2. Consistency in the last three years: The three-year period is divided into smaller time periods each with a progressing weighting.
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: It is measured by Jensen's Alpha for the last three years. Jensen's Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.
Average returns generated by the MF Scheme - [Risk Free Rate + Beta of the MF Scheme * {(Average return of the index - Risk Free Rate}
5. Asset size: For equity diversified funds, the threshold asset size is Rs 100 crore, and Rs 50 crore for balanced funds.

We have also conducted a back testing of our model portfolios, the results of which you can see below. These returns are forward returns from the base date.