Are you someone who is toying with the idea of investing in mutual funds, but wants to understand first what is it all about? Are you confused about which mutual fund investment is best? Where should you invest? How much should you invest? Do the difficult financial terms trouble you?
If the answer to any of these questions is yes, you are at the right place. In this article, we have got all these questions covered along with the best mutual funds to invest in.
The concept of Mutual funds
What are mutual funds?
Mutual funds are the companies that collect money from the public. Then the fund managers invest that money. Fund managers are professionals who have expertise in investing and fund management.
Now, these fund managers are experts in their fields and charge high fees for their expertise which is otherwise not possible for a common man to afford.
But since the mutual fund company collects money from so many people i.e. the public, they create a pool of money. They invest that money in different areas and from the returns generated, they charge a small percentage (usually 1%-3%) to pay to fund managers and their expenses. This 1-3% commission is known as the expense ratio. The remaining profits come in your pocket.
How are mutual funds different from shares?
Shares are something that you buy through a certified stock broker (A stock broker is a person who acts as an intermediary between you and the stock market). You invest your money in the stock market by buying shares of different companies.
But the problem with shares is that they tend to be riskier because you are investing on your own. While in mutual funds, your money is invested in the stock market by experts.
They ensure to diversify your portfolio i.e. to invest your money in different companies, to include debt, equity, or both keeping all the risk and return factors in mind.
Is it safe to invest in mutual funds?
Mutual funds are regulated by SEBI (Securities Exchange Boards of India). So, the chances of a mutual fund company running away with your money are next to impossible.
The only risk that comes with a mutual fund is that if you invest in a bad scheme or the fund manager invests your money in the wrong instruments, you may not get the expected returns. So it is better to choose a scheme that is aligned with your investment goals.
Which mutual fund scheme is best?
Now that you have understood the concept of mutual funds, let’s go deeper and find which mutual fund scheme would serve your best interest.
Before we proceed, please note that just like no shoe size fits everyone, similarly no one mutual fund scheme can be labeled as best. You should always do your own research and choose a scheme based on your time horizon, investment goals, risk tolerance, etc.
That being said, let’s move on to what are the different types of mutual funds? Which type serves which purpose? And how do we analyze a mutual fund scheme?
Types of Mutual Funds
There are three major types of mutual funds:
These mutual funds invest in shares/stocks of companies. They are considered high risk but they also give high returns.
Large Cap, Mid Cap, Small Cap, Multi cap, ESS are all subtypes of Equity funds themselves. Cap primarily refers to market cap or market capitalization which is nothing but the total value of companies’ shares on their current price.
- Large Cap Companies have a market Cap (i.e. market capitalization) of Rs.20000 Crore or more.
- Mid Cap Companies have a market capitalization of more than Rs.5000 but less than Rs. 20,000.
- Small-Cap Companies are the ones with a market cap under Rs. 5000.
Now, the choice of investment you make should be based on your goals, the amount of investment, the tenure for which you can stay invested, whether you want to play safe or take risks, etc.
Generally, for beginners, it is advised to invest in large caps.
These mutual funds invest in debt instruments. Debt instruments have fixed returns and are safe funds, but then the returns are also less. Examples of debt funds are debentures, government bonds, etc.
As you may have already guessed, these are a combination of both equity funds and debt funds. The ratio includes 65-85% equity and the rest of debt.
There are also many other types of mutual funds like Gilt Fund, Junk Bond Scheme, Fixed Maturity fund, and many more. These are quite easy to understand but as a beginner, you need to not dive into these details.
Which type is best for you?
If you are investing for the short term (say 1 year or 2 years), then go for debt funds. They have low risk, low return, but the returns are still greater than bank FDs.
If you are investing for the long term, you’ll either go for a lump sum or SIP.
- Lump-Sum is when you give a huge amount, say Rs. 100000 at the same time.
- SIP or Systematic Investment Plan is when you save a small amount, say Rs. 500 or Rs.2000. Every month this amount will be transferred from your saving account to your mutual fund account.
For beginners, SIP is considered the best option.
How to analyze a fund?
There are several parameters to analyze a mutual fund which include Asset Under Management, Standard deviation, Sharpe Ratio, etc. But there are three basic parameters that you must understand as a beginner:
- Returns: The amount of return that a mutual fund has made in the past years and how consistently.
- Expense Ratio: The percentage of expense ratio being charged. It is usually between 1-3%. The lower the expense ratio, the better it is.
- Entry Load and Exit Load: The cost/ fees for entering and exiting that scheme. You do not think of exiting a scheme when you enter it but still, it should be kept in mind.
Best Mutual Fund Investments
Here, we provide you a list of top 10 best mutual fund schemes from various categories. They have been chosen based on their consistent historical performance. Also, they are expected to perform better future.
- HDFC Index Fund (large cap)
- Mirae Asset Large Cap Fund
- Axis Midcap Fund
- PPFAS Mutual Funds (Multi-cap)
- Invesco Mutual Fund (Multicap)
- Axis Small Cap Mutual Fund
- SBI Small-Cap Fund
- Mirae Asset (ELSS Fund)
- ICICI Prudential Bluechip Fund
- LIC MF Large and Midcap Fund
We have included recommendations from all the categories. Choose a category that best serves your interests.
DISCLAIMER: The above article is solely for information purposes and no investment advice. Readers are not expected to take any financial decision based on this article alone. Please do your research before you invest your money, although it’s said “ Mutual Fund Sahi he” Mutual Fund is right.
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