10 top mutual funds you MUST own

Throughout the year, on several occasions, Outlook Money tells you to invest in mutual funds. And now we come to you to say it one more time. Rational thinking says that the equity markets cannot go much higher than the current levels. Yet, who knows?

With each milestone that the Sensex crossed in the past year, experts claimed that a big correction was due. Even today, stockmarket experts do not see much steam in the markets for the next one year.

Yet, on November 22, the Sensex closed at another all-time high of 13,706.53. By the time you read this, don't be surprised if there has been another high. So, what do you do?

Multiple investment options are at your service, but none are as regulated or sharply focused on you, the small investor, as mutual funds.

Outlook Money gives you a list of 10 diversified equity schemes that must form a part of your core portfolio. Why 10? Because putting all your eggs in one basket is risky and it is necessary to diversify across schemes. Because 10 is an easy number of schemes to monitor; it is difficult to manage too many.

Because if Nobel laureate Harry Markowitz showed the risk reduction benefits of holding a diversified portfolio, academicians Evans and Archer, showed that most of the risk reduction due to diversification takes place with the aggregation of eight to 10 securities.

How we chose the 10: To come up with the 10, we considered diversified equity schemes with a two-year track record and crunched their risk-adjusted returns.

We took the one-year rolling returns (an average of one-year returns over the past two-year period) and divided it by their downside risk - the possibility of a scheme giving negative returns - to get their RAR.

We left out sectoral schemes, as these are the riskiest of all equity schemes and merit frequent churning depending on your sector view. We also left out thematic funds, as they are less diversified than plain-vanilla diversified equity schemes. They work best when part of your satellite portfolio.

Next, we looked at a set of qualitative parameters. For instance, our list of 10 schemes comes from fund houses with good pedigree and a long-term track record. Schemes that have witnessed frequent fund management changes were avoided. We also avoided excessive fund house concentration, though HDFC and Sundaram BNP Paribas Mutual Funds have two each of their schemes in our list.

Two schemes that have made it to our list are a slight deviation from the above. While one has a lower RAR, the other is a little less than two years old. Despite this, we feel you must own them; we'll tell you why once we get to them.

Our schemes are not necessarily the 10 best performing schemes in the past year. Our focus is to give you 10 schemes that we think will perform well in the next two to three years, using a healthy mix of numbers and qualitative parameters.

While it's good to own these schemes, you need not own all of them. Depending on the amount you want to invest, you may pick and choose from the list. Read more about each scheme to see which fits you the best.

Just holding is not enough: Your job is not done once you buy into a mutual fund. It's imperative that you consistently, not day-to-day, but, say, once in a month or two, monitor your scheme's performance.

Remember, you invest for the long term. So ignore short term blips. But if your scheme consistently underperforms its benchmark index, it's time for you to look around for better options.

Also, watch out for a change in fund management. The past two years has seen a lot of churn of fund managements. When fund managers change, styles and, at times, even fund strategies change. So watch out. You may want to give a year's time to the new fund manager to perform. If he does not match up to his predecessor, it is time for you to move out.

For now, it's time for you to move in. Over the next few pages, in no particular order, we present the 10 schemes we think you should own.