A mutual fund pools money (investments) from individuals and institutional investors who have a common investment objective. This pooled sum of money is managed by a fund manager who invests in various securities or asset classes (stocks, debt instruments, etc) to generate returns for investors. Mutual funds offer professional money management, transparency, and liquidity.
By determining a scheme’s Net Asset Value (NAV), the income or profits from this collective investment are split proportionately among investors after taking into account any applicable costs and taxes. NAV is the price of each unit of a mutual fund. It is the weighted average value of the stocks or other assets in the scheme/portfolio. The performance of the securities that the mutual fund invests in determines the value of the fund.
What are the Different Types of Mutual Funds?
1. Equity Mutual Funds
Equity mutual funds generate returns by investing in stocks of publicly listed companies across market capitalisation (small-cap, mid-cap, and large-cap). They are typically known to generate better returns than fixed deposits or debt-based funds. Equity mutual funds can be based on a particular theme such as emerging markets, dividend yield, energy funds, tax-saving, etc. It can also be based on different sectors such as financial services, automobiles, and fast-moving consumer goods (FMCG). The profits and losses generated from EMFs depend solely on the performance of the shares included in them.
2. Debt Mutual Funds
Debt mutual funds invest in fixed-income securities such as corporate bonds, treasury bills, commercial papers, and government securities. Such debt instruments have a pre-determined maturity date and interest rate that the buyer can earn at the time of maturity. It can be a preferred choice for passive investors that have a low-risk appetite.
3. Liquid Funds
These funds invest in short-term fixed-income instruments with a maturity of up to 91 days. Liquid funds carry the lowest interest-rate risk in the debt funds category.
4. Index Funds
An index mutual fund invests in a portfolio of stocks that track or imitate stock market indices such as the NSE NIFTY and BSE Sensex. They are passively managed funds that have exposure to securities present in the underlying index in the same proportion. It aims to match the returns offered by the underlying index.
5. Balanced Funds
Balanced Funds (also known as hybrid funds) are financial instruments that invest in a mix of both equity and debt segments in specific ratios. Fund managers keep changing the allocation/ratio based on market risks. These funds often provide the best risk-reward balance and help to maximise the return on investment (RoI).
6. Fund of Funds
Fund of funds (FoFs) is a type of mutual fund that utilises the money pooled from its clients to invest in various other types of mutual funds available in the market. Thus, the returns of a FoF depend on the performance of the target fund.
7. Tax Saving Funds (ELSS)
An Equity-Linked Savings Scheme (ELSS) is a category of mutual fund that helps in saving taxes. It provides the dual advantage of wealth creation and tax saving under Section 80C of the Income Tax Act. By investing in ELSS mutual funds, you can claim a tax exemption of up to Rs 1.50 lakh from your annual taxable income.
Things to Consider Before Investing in Mutual Funds
Your Investment Objective
Investments in mutual funds can be classified as either long-term (>5 years) or short-term (<5 years). If you plan to invest for the long term, look for funds that invest in stocks and debt instruments with potentially higher returns. However, such funds come with higher risks. If you plan to invest for the short term, seek out investments with smaller returns, minimal risk, and those that have shown consistent growth over time.
Fund Performance
The aim of the mutual fund should be to outperform the market. So it’s crucial to assess the fund’s performance over the past few years before making an investment decision. Ideally, a five-year period of data would provide a reliable evaluation.
Fund Manager Experience
The longer a fund manager has had effective fund management, the better. They have more experience dealing with crises like downturns in markets.
Expense Ratio
The amount used to cover the salary of the fund manager, advertising charges, and other costs related to managing a fund is known as the expense ratio. This figure should ideally be less than 1%. However, if the expense ratio is more than 1%, it means that the fund has been consistently earning good returns.
Which are the Best Mutual Funds to Invest in 2023?
| S. No | Mutual Funds | 5-Year CAGR |
| 1 | Axis Bluechip Fund Direct-Growth | 12.24% |
| 2 | Quant Small Cap Fund Direct Plan-Growth | 27.46% |
| 3 | Parag Parikh Flexi Cap Fund Direct-Growth | 19.08% |
| 4 | SBI Equity Hybrid Fund Direct Plan-Growth | 12.42% |
| 5 | HDFC Mid-Cap Opportunities Direct Plan-Growth | 17.65% |
Axis Bluechip Fund Direct-Growth
- Axis Bluechip Fund Direct-Growth has 89.56% investment in domestic equities, of which 74.09% is in large-cap stocks and 3.4% is in mid-cap stocks.
- The fund has a 0.97% investment in government securities.
- The mutual fund has Assets under Management (AUM) of close to ₹33,500 crores.
- Since its launch in 2013, it has delivered an average annual returns of 14.6%. Axis Bluechip Fund Direct-Growth has given a CAGR of 12.24% in the last 5 years.
- The fund has an expense ratio of 0.62%, which is less than what most other large-cap funds charge.
Investors who wish to invest in this mutual fund should also be prepared for the risk of experiencing moderate losses on their investments over time. This fund is appropriate for investors seeking substantial returns over at least a span of 3-4 years.
Quant Small Cap Fund Direct Plan-Growth
Quant Small Cap Fund Direct Plan-Growth is a small-cap mutual fund scheme from Quant Mutual Fund.
- It is a medium-sized fund in its category with an AUM of ₹4,688 crores.
- The fund’s expense ratio is 0.62%, which is lower than that of the majority of other small-cap funds.
- Since its launch in 2013, it has delivered 16.64% average annual returns. This mutual fund has been able to give a CAGR of 27.46% over the past 5 years.
The scheme’s ability to deliver returns consistently is higher than most funds of its category. Its ability to control losses in a falling market is below average. The fund has the majority of its money invested in the Financial, Energy, Services, Consumer Staples, Metals & Mining sectors. It has taken less exposure in the Financial, Energy sectors compared to other funds in the category.
Parag Parikh Flexi Cap Fund Direct-Growth
Parag Parikh Flexi Cap Fund Direct-Growth is a flexi-cap mutual fund product from PPFAS Mutual Fund. It is a medium-sized fund in its category.
- It has ₹35,965 crore in AUM.
- The fund’s expense ratio of 0.71% is comparable to that of the majority of other Flexi Cap funds.
- Since its launch in 2013, it has delivered 19.24% average annual returns and a 5 Year CAGR of 19.08%.
Parag Parikh Flexi Cap Fund Direct-Growth scheme’s ability to deliver returns consistently is in-line with most funds of its category. It has an average capacity to limit losses in a declining market. The financial, services, technology, consumer staples, and energy sectors are where the majority of the fund’s capital is invested.
SBI Equity Hybrid Fund Direct Plan-Growth
SBI Equity Hybrid Fund Direct Plan-Growth is an aggressive hybrid mutual fund scheme from SBI Mutual Fund. It is a medium-sized fund in its category.
- It has an AUM of ₹57,161 crore.
- The fund’s expense ratio of 0.8% is comparable to that of the majority of other aggressive hybrid funds.
- At the moment, the fund is allocated 79.12% to equities and 18.96% to debt.
- Since its launch, it has delivered 14.44% average annual returns and has a 5-Year CAGR of 12.42%.
The SBI Equity Hybrid Fund Direct Plan-Growth plan has a consistency of return that is comparable to the majority of funds in its class. It has an average capacity to limit losses in a declining market. Investments in the financial, healthcare, services, automotive, and communication industries make up the majority of the fund’s stock holdings. The debt portion of the fund has low credit quality indicating the quality of borrowers it has lent it to is not too great.
HDFC Mid-Cap Opportunities Direct Plan-Growth
HDFC Mid-Cap Opportunities Direct Plan-Growth is a Mid-Cap mutual fund scheme from HDFC Mutual Fund.
- It is a medium-sized fund in its category and has an AUM of ₹39,296 crores.
- The fund’s expense ratio is greater than what the majority of other mid-cap funds charge at 0.91%.
- It has generated returns of 20.05% on average year since its inception in 2013. It has given a CAGR of 17.65% in the last five years.
The scheme’s ability to consistently provide returns is comparable to that of the majority of funds in its class. It performs better than average at limiting losses in a declining market. The financial, capital goods, services, healthcare, and automobile industries are where the fund has the majority of its investments.
Conclusion
Over the past ten years, mutual funds have been a profitable investment choice for Indian investors. They provide an easy and affordable option to diversify your portfolio and increase your wealth while lowering risk.
However, do keep in mind that mutual fund investing entails risks such as market volatility, potential loss of principal, and lack of control over individual holdings. Future outcomes cannot be predicted based on past performance. Investors should carefully consider their risk tolerance and objectives before investing.
Disclaimer: The mutual funds mentioned in the article are solely for educational purposes. Please do your own research before investing.
