Popular mutual funds in India

Mutual funds offer a way for investors to grow their wealth without going through the tedious and time consuming process of day to day decision making and management of investments. Also, investors benefit from the market expertise of fund managers who manage their investments for them.

Key Points

• Mutual funds are investments made in equity or debt by the subscribers based on their choice of funds.
• Look at the historical performance of the fund - rates of return, performance in relation to market benchmarks/indices, rise in Net Asset Value - NAV and dividends paid.
• Time period of investment - Choose appropriate funds that maximise returns for you at the end of the time horizon when you choose to sell your mutual fund holdings.

Mutual funds offer a hassle free way for the retail and corporate investor to participate in the market without requiring intensive knowledge or expertise.

An Introduction

Mutual funds are investments made in equity or debt by the subscribers based on their choice of funds. The money raised is invested in equity/debt by a fund manager. The subscribers of the fund can sell their holdings to make a profit or earn money from dividends paid out at intervals. Click here to know more about how to select the best mutual funds for investing.

Risk Profiling:

• Plan investment to reach your goals

• Determine how much money you'd need to earn to meet your objectives.

• Look at ways you can put aside money for investing.

• Make provisions for emergency expenses by setting up a contingency fund.

• Decide how much risk you can afford

• There are different styles of investing, each associated with a differing level of risk: aggressive, moderate and conservative.

• Choose which risk-taking behavior suits your pocket:

• Aggressive - This style of investment is characterised by a relatively higher investment in equity than in debt. Also, these funds invest more in mid and small cap equity funds. These funds offer the probability of higher returns albeit at an increased risk level.

• Moderate/balanced - Compared to growth oriented aggressive portfolios, these funds invest relatively more in large/medium cap equity funds and/or debt to bring down risk while offering a chance at getting decent returns.

• Conservative - This style is characterised by investment in low risk debt instruments/large cap equity. Returns are low but are more or less guaranteed.

Building up a portfolio:

It's always wise to invest in multiple mutual funds and not put all your money in a single scheme which exposes you to greater volatility and increases the risk of losing your investment.

Once you’ve identified your risk appetite, you can begin browsing for mutual funds that suit your budget.

• Break down how much you need to invest in debt and equity - large/mid/small caps to achieve your goals.
• Pick funds based on the following criteria
• Historical performance of the fund - Rates of return, performance in relation to market benchmarks/indices, rise in Net asset value and dividends paid.
• Assess charges to be paid to intermediaries (broker/financial agent/planner) and fund managing expenses to calculate effective returns.
• Time period of investment - Choose appropriate funds that maximise your returns at the end of the time horizon when you choose to sell your mutual fund holdings. Funds charge varying selling fees based on the duration for which you hold the fund.
• Evaluate market trends and possible future developments before investing in a particular fund.

Types of funds in India with examples

• Equity based funds

These funds invest more in equity and usually have a better historical record of offering better returns than debt funds. However, there is a higher element of risk in the equity market.

• Large cap equity funds These funds invest in the equity of companies with huge market capitalization. They offer stable returns at a reduced risk although returns are modest. Some examples of large cap funds are: SBI Bluechip Fund; Mirae Asset India Opportunities Fund; Invesco India Growth Fund.
• Mid cap equity funds These funds invest in mid sized companies with intermediate market capitalization between large and small cap companies. They offer better returns than large cap equity funds albeit at the cost of increased risk. Long term investments are advisable as they even out short term market volatility. Top rated mid cap funds include: Aditya Birla Sun Life Small and Midcap Fund; L&T India Mid Cap Fund.
• Flexi/Multi Cap Equity FundsThese funds invest in equity irrespective of market capitalization. They offer the prospect of better returns over purely large cap funds all the while at a risk lower than with mid cap funds. High performing funds in flexi/multi cap equity funds include: Franklin India Flexi Cap Fund; Aditya Birla Sun Life Advantage Fund ; Motilal Oswal Most Focused Multicap 35 Fund; SBI Magnum Multicap Fund.
• Sector specific equity funds These funds invest in specific sectors like banking, infrastructure etc. Investment in these funds carries a high risk as investment is not diversified but can also provide greater returns if the sector performs well.Some of the best performing sector funds are: Aditya Birla Sun Life Banking and Financial Services Fund (banking); ICICI Prudential Banking and Financial Services Fund (banking); Franklin Build India Fund (infrastructure).
• Tax saving equity funds Upto 1.5 lakh rupee of taxable income can be invested in tax saving mutual funds to avail income tax exemption. Some examples of AMCs that have tax-saving equity funds are: Aditya Birla Sun Life Tax Relief 96; Axis Long Term Equity Fund

• Debt based funds

Debt based funds primarily invest in debt instruments. These funds are associated with a lower risk and stable returns, though returns are modest.

Debt funds can be categorised into:

• Medium term bond funds/Gilt funds - Returns are variable with change in bond interest rates. These funds offer more security than equity funds but carry a higher risk than short/ultra short term debt funds.
• Short/Ultra short term debt funds - Returns are more assured and volatility/risk is much less than long term debt/equity funds.
• Liquid debt funds - These funds invest in short term money market instruments and have very low risk profile. They offer better returns than money deposited in bank savings account.
• Credit opportunities fund - These invest in low credit rated debts for a chance at higher returns at the cost of increased risk.
• Dynamic bonds - These invest in debt funds across the spectrum and fund managers manage investments in response to and in anticipation of market conditions.

Some of the top rated funds are

• SBI magnum gilt fund
• Franklin India low duration fund (Short term debt)
• Franklin India Government Securities Fund (Ultra short term debt)
• BOI AXA treasury advantage fund (Ultra short term debt)

• Hybrid funds

These funds invest in a mix of both equity and debt.

• Equity oriented funds: L&T India prudence fund; DSP BlackRock Balanced Fund.
• Debt oriented funds: SBI Magnum Monthly Income Plan; Aditya Birla Sun Life Monthly Income Plan II.

*Please note that RKSV/UPSTOX is not a registered investment advisor or a research analyst. Users discretion is required before investing and can seek guidance from independent advisors.

Wrapping up

• Mutual funds are funds which raise money from the public and invest in equity/debt.
• Devise an investing strategy to reach particular objectives.
• Decide on an investing style according to your appetite for risk.
• Diversify your investments
• Choose funds based on performance and net effective returns over the investment time horizon.