Multi-cap MFs yield best in SIP

Systematic investment plans (SIPs) have been observed to be the simplest and most useful wealth creation tools in the hands of average retail investors. But here too, diversity in portfolio helps. SIPs in multi-cap or diversified equity mutual funds(MFs) have given more bang for the bucks both in the long and short run.

Analysis shows that while SIPs in the best performing diversified funds generated average returns of 7.4% in the past year (till April 30), top large-cap funds gained 5.5%. Mid-cap funds slipped 1.7% during the period. Diversified funds gave 32.4% annual gains in the three-year period under the SIP route compared to 22.7% and 25.9% returns generated by large-cap and mid-cap equity MFs. "SIPs work well with diversified equity funds," says Srikanth Meenakshi, co-founder and director, FundsIndia, an online investing platform.

The average annual returns through SIPs of diversified funds are higher than their peers in the five-year period as well. Multi-cap funds invest across market capitalisation and are not biased towards any particular theme, sector or style. This gives fund managers the much-needed flexibility to make quick changes depending on market conditions.

"Their (diversified funds) ability to move into different m-caps has given them the edge (over peers)," says Anil Rego, CEO, Right Horizons, a wealth management firm.

These funds have benefited from astute sector moves, which have ensured robust performance. For instance, a leading diversified MF nearly doubled its exposure to auto stocks between August 2010 and April 2011, which improved its fortunes.

The underperformance of small and mid-cap stocks, which usually rise and fall at a faster pace than other categories, has also enabled diversified funds to stay on top. Analysts say that diversified funds are also capable of outperforming large cap funds.

Analysts further say that though these funds tend to sway with market swings by investing more in momentary best performers, they are less risky than mid-cap and thematic funds. Though diversified MFs should form an essential part of the portfolio, investors should carefully examine the quality of fund management, their 3-5 year performance and track record of the asset management company before making a decision, say experts.