Large-cap, Flexi-cap, Small & Mid Cap and Tax Saving Funds for your 2018 investments

We started Clearfunds with one simple motto.

We will not sell anything that’s not in the best interest of our customers.

Instead, we would deliver unbiased, competent financial advice. At a fair price.

We were disillusioned with a wealth management industry where professional investment advice is exclusive to the ultra-rich — and is often driven by how much commissions the advisor is making under the table. In the modern world, there is a way to make high-quality investment advice available to everyone. This advice doesn’t need to be based on commissions, or our subjective opinions of a fund manager or the size and influence of his fund company. Instead, this advice should be based on cold, raw, hard…. data.

If we have data, let’s look at data. If all we have are opinions, let’s go with mine.

— Jim Barksdale, former Netscape CEO

Around 50 years ago, the statistician Edward Demmings set out the principal rule for modern decision making: “In God we Trust, all others bring data”

So at Clearfunds, we use this basic principle and apply big-data science and analysis to come up with a short list of funds that can help you narrow down your investment choices from the hundreds of mutual funds available. We have introduced a ‘low-cost index fund’ recommendation based on the available options as a hat tip to all you Bogleheads out there.

Our Equity Fund recommendations for 2018 are:

Equity Large Cap

Large cap diversified funds should form the core of your investment holdings.

• ICICI Prudential Focused Bluechip Equity Fund Growth (Direct)
• Aditya Birla Sun Life Frontline Equity Fund Growth (Direct)
• UTI Nifty Index Fund Growth(Low-cost Index Fund, Direct)

Equity Flexi-Cap or Multi-Cap

These funds are not biased towards either large- or mid-cap stocks but select stocks in their portfolio wherever they see investment opportunities.

• Motilal Oswal Multicap 35 Fund Growth (Direct)
• DSP BlackRock Equity Opportunities Fund Growth (Direct)

Equity Small & Mid-Cap

Small and mid-cap focussed funds are more volatile, but can often help boost overall returns of your portfolio. These are suitable for investors who have the ability to take on higher risk of losses.

• L&T Midcap Fund Growth (Direct)
• IDFC Sterling Equity Fund Growth (Direct)
• ICICI Prudential Nifty Next 50 Index Fund Growth (Low-cost Index Fund, Direct)

An excellent fund that we would have considered recommending is Mirae Asset Emerging Bluechip Growth — but the Fund Company has closed this scheme for fresh purchases.

Tax Saving Equity Funds (ELSS):

In order to reduce your tax bill, you can invest up to Rs 150,000 a year in Tax Saving (ELSS) funds under section 80C of the Income-tax Act.

• Axis Long Term Equity Fund Growth (Direct)
• L&T Tax Advantage Growth (Direct)

How does the algorithm work?

Our objective remains the same as earlier — to design a data-driven predictive model that optimises the 2-year returns on funds with minimal volatility.

We started with the entire universe of mutual funds and selected only growth options, which are best suited from a tax perspective. We limited our analysis to only diversified equity mutual funds — a mix of Large Cap, Flexi Cap and Mid & Small Cap funds helps investors diversify their holdings across sectors without the ups and downs that comes with holding sector-specific funds.

We’ve eliminated the funds which have been in existence for less than 3 years — data needs a track record or history that a fund can be judged upon. To make sure that you can sell your holdings with minimal price impact when needed, we set the minimum size cut-off to Rs 500 crore for Large Cap funds and Rs 150 crore for all other funds.

Finally, while we will only recommend direct plans (see why), our analysis is on the regular plans as they have a longer history of data for our algorithm to work on.

Now for the hard work…

We collected even more data for these funds than we did last year (136 factors vs 30 factors studied for last year’s model) and threw this into a brand new big-data statistical computing environment with one goal — to identify the factors that would determine 2-year performance. Our statistical model generated more than three million data points for our study.

Over the last few months spent studying longitudinal trends within the data, and randomising it to eliminate overfitting, we were able to identify a number of significant variables that would predict 2-year outperformance. The result is a sophisticated, back-tested scoring algorithm that enables us to continuously identify optimal funds across market cycles.

No model or algorithm can predict the future with 100% accuracy, but the back-testing results of our recommended funds (our proprietary model applied consistently for each of the last six years) are below.

Our model is able to recommend funds that beat their category average between 66–87% of the time. Around two-thirds of the time, our model recommended funds that fall within the first two quintiles (in the top 40% of all funds in each category).

You can invest in all our 2018 recommended funds at Clearfunds. Once you set up your account (it only takes five minutes), you can buy funds from 36 different Mutual Fund Companies (including all the major ones) at a flat fee of Rs 199 per purchase, or each time you set up an SIP.

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The Best Equity Mutual Funds to Invest in 2018 was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.