Mutual Funds

A mutual fund is a financial instrument that is used to invest in financial securities such as shares, bonds, money market tools, stocks, and other financial assets. In mutual funds, the money is collected from the investors as a single entity and is invested in financial markets.

These funds are managed by professionals who are also known as Fund Managers. Fund managers decide the financial tool they want to invest the pooled money in to gain profit.  The profit or loss is divided among the investors based on proportion, according to their investment.

In this article, you will know the important aspect of mutual funds and how you can choose the best mutual funds scheme for your financial goals.

Top Mutual Funds in India to invest

Here is the list of the top mutual fund investment options in India-

Top Equity Funds 

Here is the list of Top equity funds in India offered by major fund house/financial institutions-

Top Debt Funds

Here is the list of Top debt funds in India offered by major fund house/financial institutions-

Top Hybrid Funds

Here is the list of Hybrid equity funds in India offered by major fund house/financial institutions-

Mutual Funds: Type 

Mutual Funds are broadly divided according to their equity exposure and asset allocation. These are Equity Mutual Funds, Debt Mutual Funds, and Balanced Mutual Funds. The returns and the risk vary according to the Mutual Fund type. Here are major mutual funds and their types- 

• Equity Mutual Funds
• Debt Mutual Funds
• Balanced/Hybrid Mutual Funds

Equity Mutual Funds

With the help of Equity mutual funds, investors can invest in the equity shares of different companies. Your mutual fund investment is called an equity fund investment when you invest around 65% of your investment portfolio in equity tools.

Equity Mutual fund is among the highest return provider mutual fund. This type of Mutual fund depends on the financial market. It is affected by the global political and economic scenario. Here is the list of different types of equity Mutual Funds- 

Small-Cap Funds

Under this investment tool, the investors invest in only those financial securities that are linked with equity, companies that have equity-linked tools with small market cap. The companies with small-cap have a ranking below 251 in market cap.

Mid-Cap Funds

This type of fund investment includes companies with mid or medium-market capitalization. The investment is made in the equity of these companies. The companies that come under mid-cap according to SEBI are ranked between 101 to 250 in Market Cap.

Large-Cap Funds

These types of funds involve investment in companies with large market capitalization. The investment is made in the equity-linked tools and equity of these companies. According to SEBI, the large-cap companies are those that have a market capitalization rank between 1 to 100.

Multi-Cap Funds

Under this investment tool, an investment is made into the equity and equity-linked tools of any company. The market cap does not matter for this fund. The assets are allocated according to the movements of the market. A fund manager aims to achieve higher returns under this equity fund.

Thematic/ Sector Funds

These types of Mutual funds target specific service sectors such as IT and FMCG. The investment is made in the equity and equity-linked tools of these companies.

Index Funds

This mutual fund type emulates and tracks the performance of a major stock market index. For example, NSE Nifty50 and S&P BSE Sensex. The allocation of assets is like the underlying index. The returns of Index funds are the same as the underlying funds.

ELSS

ELSS stands for equity-linked savings scheme. This Mutual comes under the income tax act, 1961 (Section 80C). You can make an income tax benefit of around 1,50,000 / year if you invest in an equity-linked savings scheme.

Debt Mutual Funds

This type of Mutual fund investment mostly invests in fixed-income securities.  In debt mutual funds the investors invest in deposit certificates, treasury bills and government bonds, and other highly rated financial securities.

A mutual fund is considered a debt fund when the investor invests 65% of an investment portfolio in different debt securities. This type of Mutual fund is perfect for those investors who do not like to take financial risks.

Debt funds do not get affected by market fluctuation. An investor can easily predict the profits in Debt Mutual Funds. the different types of Debt Mutual Funds are explained below- 

Dynamic Bond Funds

This type of Mutual fund depends on the modified investment portfolio that is based on the market fluctuation.

Income Funds

This type of Mutual fund has a long maturity period. In this type of mutual fund, investors invest in financial securities with a long-term maturity period to get stable returns.  The average maturity period of income funds is around 5 years.

Short-Term/Ultra Short-Term Debt Funds

Under this mutual fund investment, the investors go for those financial securities that have a short-term return period (1-3 years). A perfect choice for those investors who do not like taking financial risks.

Liquid Funds

In a liquid fund, investors opt for the ninety-one-day maturity period for the investment made in different financial tools. It is the best option for investors who want high returns with their surplus amount.

Gilt Funds

These types of debt funds make investments in government securities that are high-rated. These funds have low financial risk and are perfect for those who do not like taking risks.

Credit Opportunities Funds

These types of Mutual funds have a higher financial risk and a higher profit rate. It is best for those investors who do not mind taking financial risks.

Fixed Maturity Plans

These types of Mutual funds are types of closed-ended funds and are based on fixed maturity plans. The investments are made in fixed income securities like Government Bonds. It has a lock-in period and the investors can only invest during the active fund offer period.

Balanced/Hybrid Mutual Funds

With the help of Hybrid Mutual funds, investors can invest in equity and debt mutual funds. Balanced or Hybrid mutual funds try to balance the risk and reward of the said investment. Investors can diversify their portfolios for better returns and lower risks.

 The portfolio under this mutual fund investment is constantly upgraded by the fund manager to reach the aspired financial goals. Here are the different types of Balance/ Hybrid Mutual funds.

Equity-Oriented Hybrid Funds

This investment invests in equities (65% of Investment portfolio) and Fixed income securities.

Debt-Oriented Hybrid Funds

This type of investment is the opposite of equity-oriented balanced funds. 65% of the portfolio is invested into fixed income securities (government securities, treasury bills, etc.) and the rest funds are invested by the investors in equities or related instruments.

Monthly Income Plans

The main goal of a monthly income plan is to gain steady returns for the specified period. It primarily invests in debt instruments. The exposure to equities is around 20%. Investors can decide the dividend-receiving period.

Arbitrage Funds

In this type of Balance Mutual fund, the returns are gained by trading financial securities. The securities are purchased at a high price and sold at a high price. In case the arbitrage chances are unavailable for the investor, the fund manager can invest in other options such as debt securities.

Mutual Funds: How It works 

A mutual fund acts as an investment instrument and a Company. When you buy stock of a company, you become a partial owner of the company and its instruments. A mutual fund acts the same way. 

• When you invest in a mutual fund, you own the asset and the company itself. The difference between buying a share of a company is that it is dedicated to a specific service whereas mutual funds are designed to create investment opportunities.
• In a mutual fund, investors earn profit via interest and dividends held under an investment portfolio. The earnings are distributed among the investors. You can opt between reinvestment or keeping the profit.
• In case the funds sell the financial securities that have higher price value, the fund gains profit and the return is distributed among the investors. If the fund manager decides not to sell the high-priced securities, the share becomes highly valuable. You can sell your shares for a profit further.
• The fund manager oversees and invests related decisions in the best interests of investors. The investment portfolio gets daily evaluation to see the potential gain or loss.

Mutual Funds: Why you should invest in Mutual Funds 

There are many benefits of investing in a mutual fund, some of the major factors are mentioned below- 

• Expert’s Assistant: When you invest in a mutual fund you get the assistance of professionals who are also known as fund managers. These fund managers make decisions about the investment. A fund manager is supported and assisted by an analyst team who track the performance of stocks and other financial assets.
• No Lock-in Period: Mutual funds do not come with a lock-in period. It means that you can withdraw your investment any time you wish.
• Affordable mode of investment: One can start investing in Mutual funds with only INR 500 In India. To manage the funds of the investors, there is a small fee that is paid to the fund management companies.
• Systematic Investment Plan- An investment plan is like the backbone of the investors. A systematic investment allows you to invest according to your comfort and choice.
• Transfer Funds: When you think the time is right for you to switch your funds to gain more profit, you can easily do it with Mutual Funds. The condition is that the fund house should remain the same.
• Goal-Oriented Funds: Different Mutual schemes cater to the needs of different investors. The investment is made according to the risk profile, investment type, and profit potential to meet a specific investment goal.
• Portfolio Diversification: With the help of Mutual funds, you can invest in different financial instruments at the same time. This lowers the risk of financial loss. In case of the bad performance of an investment tool, another asset provides financial backup.
• Flexibility: Mutual funds have gained much popularity among investors due to a no lock-in period and systematic investment plans that are unavailable in most of the investment options. Mutual funds help the investors create emergency funds that they can withdraw anytime.
• Liquidity: One attractive feature of Mutual funds is the liquidity of assets. Due to no lock-in period, the investment made can be converted into cash.

Mutual Funds: Advantage 

Mutual Funds come with many advantages, some of the major advantages are mentioned below-

• Diversification: Mutual funds provide a better investment choice and diverse investment portfolio at an affordable price. The diversification of the investment portfolio helps in reducing the financial risk and creating the possibilities of better returns.
• Easy Access: In comparison to big trading platforms, investment in Mutual funds is quite easy. Mutual funds also offer feasibility in exotic commodities and foreign equities. 
• Economies of Scale: Mutual funds are the only investment that provides investment facilities in a large investment market at the same time. This makes them cost-effective for investors. It also helps the small investors be a part of big investment plans. 
• Professional Management: investors who lack the time can leave their investment decisions at the hands of fund managers. Fund managers are professionals who take all the investment-related decisions on the behalf of investors.
• A lot of investment options: one of the attractive features of Mutual funds is that they provide a variety of options to the investors to make an investment choice. It also helps the small investors to get exposure to foreign markets and domestic investment. It also helps investors to choose from the different investment styles. 
• Transparency: Mutual funds remain under industry regulations. It increases their reliability and fairness for newcomers and investors.

Mutual Funds: Disadvantages

Mutual funds have many benefits, however, they also come with many disadvantages. the main disadvantages of Mutual funds are mentioned below-

• Uncertain Returns: Investment always comes with the risk of financial risks and mutual funds are no exception. There are chances that your mutual fund will fall in price and the opposite is also relevant.
• Cash Drag: The no lock-in period of Mutual funds backfires here. Due to the no lock-in period and easy withdrawal process, fund houses must keep a lump sum amount away to meet the redemption demand. It means that not all the pooled money is being used in investment, which does not sound right in the case of investment.
• High cost: As you know, Mutual funds are managed by funds managers on behalf of investors. But a significant amount is paid to the fund houses to manage these funds. It can have a long-term negative effect on your return irrespective of profit or gain.
• Diversification: Diversification is a boon to investors if done properly. But what if it is not fulfilling its functions properly such as risk reduction? Too much diversification can lead to complexity that can result in poor results.
• Tax: When a security is sold, a tax is triggered on the gained capital. If you have concerns related to taxation, you should rethink before investing.

Mutual Funds: Who Should Invest?

Here are a few important points regarding who should invest in Mutual funds-

• Any person who has a financial goal can invest in Mutual funds. You can achieve your investment goals with the help of Mutual funds.
• Explore the most suitable mutual fund scheme for yourself. Go for the best mutual funds.
• You need to check how much risk you can take, what are your investment goals and what is your investment term before investing.
• Lastly, if you have an investment goal for the long term, Mutual funds are the best option for you.

Mutual Funds: When to invest? 

Here are some points to note when it comes to the right time of investing in Mutual funds-

• Investors do not have to wait for a particular time to start investing in Mutual funds. The right time for investment is decided by the fund managers.
• If the investor selects a systematic investment plan, it will benefit him/her.
• Go for the rupee-cost average system while buying a fund unit in the market.

Mutual Funds: How to Save Taxes?

An equity-linked savings scheme is the best tax saving mutual fund investment option which comes under the income tax act, 1961 (80C). here are some features of ELSS- 

• The asset allocation is made in equity-linked securities and equity of different companies.
• It is the only mutual fund scheme that is covered under the Income Tax act 1961. 
• The lock-in period of this mutual fund is just three years. The return is around 12-15%.
• ELSS is probably the best tax-saving investment option which also provides a shield against inflation.
• You can save up to INR 46,000/ year with the help of ELSS so you can generate revenue and reap the benefits of tax deductions simultaneously.

Mutual funds are one of the best investment options for those who are looking for No lock-in period and long-term returns.

Mutual Funds – FAQs

Q1.Can I invest in mutual funds starting with INR 500? 

Ans. Yes, you can invest in mutual funds with INR 500. Some major fund houses provide cost-effective investment options to investors.

Q2. Does SBI offer a Mutual Fund for the investors to invest in? 

Ans. Yes! SBI offers a Mutual fund investment under its SBI Technology Opportunities Fund – Direct Plan-Growth. It is an equity fund investment that offers high returns.

Q3. Is SIP a good option for investors?

Ans. SIP is a good option for those investors who are looking for low-risk investment in Mutual funds. It depends on the investment goals and risk appetite of the investor. You can also choose a lump sum if you do not have any issue with the financial risk.

Q4. Explain expense ratio in simple words?

Ans. In Mutual funds, the funds of investors are managed by fund houses via a fund manager. This fee is around 2.5% of the total investment made by the investor.

Q5. Can NRIs invest in mutual funds?

Ans. Anyone can invest in a mutual fund that has their KYC completed. However, it largely depends on the fund houses to accept the investors. Some fund houses do not allow investment facilities to NRIs who live in Canada and America due to FATCA.

Q6. Can I withdraw from the Mutual Funds investment anytime?

Ans. Yes, you can make a redemption request anytime if you have invested in mutual funds. You have the option to withdraw your mutual funds when you reach your financial goal or reinvest the surplus amount.

Q7. Am I exposed to risk while investing in Mutual Funds?

Ans. Yes, any type of investment comes with a significant risk of financial risk. If you are new to the investment, it is advisable to take the help of an expert.