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A mutual fund is formed when an asset management company (AMC) pools investments from several individual and institutional investors to purchase securities such as stocks and bonds.
The AMCs have fund managers to manage the pooled investment. These are finance professionals with an excellent track record of managing a portfolio of investments. In short, mutual funds club investments from various investors to invest their money in bonds, stocks, and other similar avenues.
Mutual fund investors are assigned with fund units corresponding to their quantum of investment. Investors are allowed to purchase or redeem fund units only at the prevailing net asset value (NAV).
The NAV of mutual funds varies daily depending on the performance of the underlying assets. Mutual funds are well regulated by the Securities and Exchange Board of India (SEBI), and hence, they can be considered as a safe investment option. A significant advantage of investing in mutual funds is that investors can diversify their portfolio at a relatively lower investment amount.
Mutual funds are broadly classified into equity funds, debt funds and hybrid/balanced funds based on their equity exposure. If a mutual fund’s equity exposure exceeds 65%, then it is classified under equity funds. If not, then it goes under debt funds. A hybrid mutual fund invests across both equity and debt securities.
The table below shows the best equity funds:
The table below shows the best debt funds:
The table below shows the best hybrid funds:
Mutual funds should be considered as an investment option by everyone at some point in their life. Investing in mutual funds is one of the best ways to achieve your goals. Every mutual fund comes with certain objectives to achieve. Therefore, whenever you are planning to invest in mutual funds, you have to ensure that your objectives are in line with that of the fund under consideration.
Investing in via an SIP alleviated the need to arrange a lump sum. Therefore, you can get started with your investment journey with a small amount. There are mutual fund plans that allow you to invest a sum as low as Rs 100 a month through an SIP. This option is not available with most other investment options.
Every investment option comes with a risk attached. No investment is absolutely safe, including deposits. The risk level of mutual funds varies across types as it directly depends on the underlying assets. Therefore, you should invest in a mutual fund scheme only if you are willing to assume the risk that comes attached to it.
The following are some of the parameters that must be considered while selecting the top-performing funds:
Check the fund’s track record
A top-performing fund typically has an excellent track record of providing higher returns over the last three and five years. The performance of these funds would have outperformed their benchmark and peer funds. You have to analyse the fund’s performance over the last few business cycles. In particular, check for the fund’s performance when the markets were down. The performance of a top-performing fund is not affected much by the market movements. However, you need to note that past performance is not indicative of future returns.
Check the financial ratios
It is important to assess the financial ratios such as alpha and beta before deciding if a fund under consideration is a top-performing one in its category.
Returns and risk always go hand in hand. Returns are the rise in the overall value of the capital invested. Risk is defined as the uncertainty associated with an investment, and this concerns the possibility of not receiving any or negative returns due to numerous reasons. Hence, any investor must assess the risk-return potential, and this has made the risk-return analysis possible by financial ratios.
Sharpe and Alpha ratios provide much-needed information. Sharpe ratio is indicative of the excess return that the fund has delivered on the addition of every unit of risk being taken. Hence, funds with higher Sharpe ratio are considered better than those with a lower Sharpe ratio. Alpha shows the additional returns that the fund manager has generated as compared to the benchmark. Funds with higher Alpha are considered better.
Check the expense ratio
Expense ratio is a very crucial factor that must be analysed when choosing a mutual fund plan. Expense ratio is the fee charged by the fund houses to manage your investment. It is expressed in terms of a percentage of fund’s returns. It is deducted from the returns that an investor would get. Needless to say, a higher expense ratio reduces the take-home returns of investors. The fund houses cannot charge more than the limit set by the Securities and Exchange Board of India.
The expense ratio of a fund scheme should justify the returns provided. A frequent shuffling of the assets in the portfolio increases your cost of investment (expense ratio) as the fund manager incurs higher transaction costs. Check for the consistency in the expense ratio and ensure that you are incurring reasonable charges as the expense ratio. If you come across two funds with a similar asset allocation and past performance, then you may choose to invest in the one with the lower expense ratio.
Investments in any scheme should be made only after carefully assessing life goals. Once an assessment of the needs has been made, you need to map it with the objectives of a mutual fund scheme to find out if investing in it yields you the desired result. Like individuals, mutual funds too come with a particular objective, and it’s on the investors to gauge if their objectives are in sync with the mutual fund scheme they are going to invest.
You can base your mutual fund selection activity on the fund history. Mutual funds having a more extended history are considered good. Also, a mutual fund is judged based on how well it had performed over a good range of timeframe, especially when the markets were in a bad phase. This data will not be available for a newly launched fund. Investors should consider at least five years of a fund’s history before making any investment-related decision.
Performance of Fund manager
The fund manager plays a significant role in the success of a fund. Fund managers handle the investors’ money; it is the fund manager’s expertise that allows them to make profits. If a fund manager is able to recognise the opportunities to make profitable investments, then the fund would see good returns. Hence, the fund manager must have a good track record.
Expert Money Management
Since mutual funds are managed by a fund manager, the chances of making profits are on the higher side. Every fund manager is backed by a team of analysts and experts who do the research and choose the best-performing instruments to include in the fund’s portfolio. Therefore, you don’t have to possess market knowledge
Option to invest small amounts regularly
One of the most significant advantages of investing in mutual funds is that you can stagger your investments over time by taking the SIP or systematic investment plan route. Through an SIP, you can invest a fixed sum as low as Rs 100 on a regular basis. This alleviates the need to arrange for a lump sum to get started with your investment journey.
On investing in mutual funds, you automatically diversify your portfolio across several instruments. Every mutual fund invests in various securities, thereby providing investors with the benefit of exposure to a diversified portfolio.
Can redeem at any time
Most mutual fund schemes are open-ended. Therefore, you can redeem your mutual fund units at any time. This ensures that investors are provided with the benefit of liquidity and hassle-free withdrawal at all times.
All mutual fund houses are under the purview of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Apart from these, the Association of Mutual Funds in India (AMFI), a self-regulatory formed by the fund houses, also keeps an eye on fund plans. Therefore, investments made in mutual funds are safe.
If you are looking to save taxes under the provisions of Section 80C of the Income Tax Act, 1961, then you can invest in the equity-linked saving scheme (ELSS) or tax-saving mutual funds. These mutual funds provide tax deductions of up to Rs 1,50,000 a year, which helps you save up to Rs 46,800 a year in taxes.
As mentioned before, the risk level of mutual funds varies across types. Equity funds carry the highest levels of risk since they mostly invest in the equity shares of companies across market capitalisations. These funds are easily influenced by market movements.
The following are the types of risks that come attached with equity funds:
Market risk is the risk which can result in losses due to the underperformance of the market. Several factors affect market movements. To name a few; natural disasters, viral outbreaks, political unrest, and so on.
Concentration generally refers to emphasising on one particular thing. Concentrating your investments towards a particular company is never advisable. No doubt that having your investments concentrated on one sector proves to be beneficial at times when that sector performs well, but if there is any adverse development, then your losses will be magnified.
Interest Rate Risk
The interest rates fluctuate on the basis of the availability of credit with lenders and the demand from borrowers. The rise in the interest rates during the investment tenure can result in a drop in the price of securities.
Liquidity risk refers to the difficulty in exiting the holding of a security at a loss. This generally happens when the fund manager fails to find buyers.
Credit risk refers to the possibility of a scenario wherein the issuer of the security fails to pay the interest that was promised at the time of issuing the securities. You can gauge the credit risk by looking at the credit ratings given by various credit rating agencies.
The following are the types of risks that come attached with equity funds:
It is the possibility of the rate of interest varying. This may happen due to a variety of factors. A change in the rate of interest has a direct impact on the returns offered by the underlying securities.
It is the possibility of the issuer of the securities defaulting on the repayment of principal and the payment of interest at the rate agreed upon at the time of issuing the securities.
It is the possibility that the underlying securities may turn illiquid and the fund manager may find it difficult to sell the securities held under the portfolio.
The dividends provided by all mutual funds are added to your overall income and taxed as per the income tax slab you fall under. The rate of taxation of capital gains realised on selling mutual fund units varies across mutual funds and holding period.
If you sell your equity fund units within a holding period of one year from the date of purchase, then you realise short-term capital gains. These gains are taxed at a flat rate of 15%, regardless of your income tax slab. You realise long-term capital gains on redeeming your equity fund units after a holding period of one year. Long-term capital gains (LTCG) of up to Rs 1 lakh a year are made tax-exempt. Any LTCG above Rs 1 lakh a year are taxed at a flat rate of 10%, and there is no benefit of indexation provided.
Gains realised on selling debt fund units within a holding period of three years are termed short-term capital gains. These gains are added to your overall income and taxed as per your income tax slab. You make long-term capital gains on selling your debt fund units after a holding period of three years. These gains are taxed at a flat rate of 20% after indexation.
The rate of taxation of gains realised on selling units of balanced funds depends on their equity exposure. If the equity exposure of a balanced fund is in excess of 65%, then it is taxed like an equity fund. If not, then the rules of taxation of debt funds apply. Therefore, when you are investing in a hybrid fund, you should necessarily know its equity exposure.
Invest in the best type of fund that is in line with your financial goals
Top SIP Mutual Funds
Systematic investment plans (SIPs) allow investors to invest small amounts periodically. Investors are given the liberty to decide the frequency and quantum of their investment being made through SIP.
Top Equity Mutual Funds
Equity mutual funds invest predominantly in equity instruments such as stocks. These funds have the potential to offer the highest returns among all mutual funds.
Top Small-Cap Mutual Funds
Small-cap mutual funds are a class of equity funds that invest mostly in equity shares of those companies that are classified under small market capitalisation.
Top Large-Cap Mutual Funds
Large-cap mutual funds are a class of equity mutual funds that invest predominantly in equity shares of large-cap companies. These companies are not affected much by market fluctuations.
Top Multi-Cap Mutual Funds
Multi-cap mutual funds invest in equity shares of companies across all market capitalisations. Investing in multi-cap funds is the best way to diversify your portfolio.
Top Tax Saving Mutual Funds
Equity-linked savings scheme (ELSS) or tax-saving funds are equity-oriented funds and are covered under Section 80C of the Income Tax Act, 1961. Investors can avail tax deductions of up to Rs 1,50,000 a year by investing in these funds.
Top Mid-Cap Mutual Funds
Mid-cap funds are equity funds that invest in equity shares of companies whose market capitalisation is in the range of Rs 500 crore to Rs 10,000 crore.
Top Liquid Funds
Liquid funds are a class of debt funds that invest in high-rated debt instruments such as treasury bills. These are a better option than regular savings bank accounts to park idle money.
Top Debt Mutual Funds
Debt mutual funds invest in instruments such as corporate bonds, government bonds, treasury bills, and so on, that offer regular dividend payouts.
Top Short-Term Mutual Funds
Short-term mutual funds are an ideal option for risk-averse investors. The maturity period of these funds is between 15 days and 91 days.
Top Income Funds
Income funds predominantly invest in securities that are capable of providing high dividends. They generally invest in bonds, debentures and prefered shares.
Top Balanced Mutual funds
Balanced or hybrid funds invest across both debt and equity instruments. Investing in these funds is the best way to diversify one’s portfolio.