In How to invest in mutual funds, we spoke about how individuals can build a mutual fund portfolio by investing various mutual funds.

We also spoke about having core and non-core funds in your portfolio. Today, we explain these concepts in detail and tell you which funds fall under each category.

• Cool funds for a hot market

What we are talking about

1. We are only referring to equity mutual funds (funds that invest in shares of companies).

2. The portfolios recommended are meant to be held for a period of at least three to five years.

During this time frame, you are advised to monitor your fund's performance at least once in the year. See if there are any alarming declines in the fund's returns. Compare this with other funds in the category. Look at other factors, such as a change in the fund manager or an acquisition by another Asset Management Company (fund house).

• How to compare mutual funds

Core funds

Core funds should be at the heart of any portfolio. They should account for a chunk of your total mutual fund investments.

Core funds are those that offer stability coupled with returns.

Selecting core funds

Large-cap stocks fit the bill. Hence, funds that invest in such stocks would be core funds.

However, when we look at the track record of funds in India, we notice that being less volatile or doing well in a falling stock market is more to do with the ability of the fund manager than whether he has invested in large-cap or small-cap stocks.

Most large-cap funds invest in mid-caps as well.

Hence, it is wise to choose core funds depending on the fund manager's ability, which is reflected in the fund's performance record over a long-period of time.

Ideal core funds would be those that have performed well in both bull and bear markets and have invested in mid-caps from time to time.

We looked at the performance of the funds during 1998-2003, a time when the Indian stock market went through a complete cycle. A fund manager who managed his fund well during these years leaves little doubt as to his ability. 

Based on the above, these are core funds we suggest.

The winners

Franklin India Bluechip
NAV: 77.55
1-year return: 45.42%
3-year return: 55.29%
5-year return: 30.45%

Franklin India Prima Plus
NAV: 76.79
1-year return: 45.22%
3-year return: 52.86%
5-year return: 31.10%

HDFC [Get Quote] Capital Builder
NAV: 45.915
1-year return: 63.89%
3-year return: 64.31%
5-year return: 32.91%

HDFC Equity
NAV: 89.217
1-year return: 61.99%
3-year return: 63.56%
5-year return: 37.20%

HDFC Top 200
NAV: 67.043
1-year return: 56.62%
3-year return: 63.35%
5-year return: 37.64%

Pru ICICI [Get Quote] Power
NAV: 46.37
1-year return: 53.14
3-year return: 58.21
5-year return: 28.72

Reliance [Get Quote] Vision
NAV: 106.63
1-year return: 55.53%
3-year return: 64.12%
5-year return: 43.47%

Sundaram Growth
NAV: 40.1029
1-year return: 41.58%
3-year return: 51.43%
5-year return: 26.52%

Templeton India Growth
NAV: 43.81
1-year return: 44.35%
3-year return: 54.71%
5-year return: 31.34%

• Want to invest in a mutual fund but don't know how?