What is a Mutual Fund?
A Mutual Fund is an investment fund managed by skilled financial experts. They collect money from investors like us and invest it in financial securities like bonds and stocks to generate returns for us.
As the name suggests, a mutual fund serves ‘mutual’ interests of investors and fund managers. The fund managers find out potentially good investment options , invest in them in a disciplined manner and make money for investors. In return, they take a small percentage of commission as their fee. So, investors employ their money and fund managers add their skill and experience to mutually benefit both.
Are Mutual Funds Safe?
Well, mutual funds are not scams or chit funds. In India all these funds are regulated by SEBI (Securities and Exchange Board of India) and are completely legal. So, from that angle, mutual funds are safe investment options.
But yes, there are market risks involved in these funds. The funds employ the money mostly in bonds and stocks which can be volatile in the short term. Your investment value goes up and down with market movements. But, in the long run (3+ years), mutual funds generally give inflation-beating returns.
Who Run the Mutual Funds in India?
Mutual funds in India are run by large and trusted AMCs (Asset Management Companies) like SBI Funds Management Ltd. (managing ~ 7 lakh crore), ICICI Prudential (~ 5 lakh crore), HDFC AMC (4.4 lakh crore), Nippon India AMC, Aditya Birla Sun Life, Kotak Mahindra AMC, Axis AMC, UTI AMC, IDFC AMC etc. There are total 44 AMCs operating in India as on September 2022.
Different Types of Mutual Funds and Their Objectives
There are various kinds of mutual fund schemes operated by the AMCs. Most large AMCs have more than hundred schemes according to their different investment thesis.
According to investment allocation, mutual funds are of three types –
- Equity Funds – Equity funds invest in stocks of different companies. These are high-volatility high-return kind of funds used for mid to long-term wealth creation. Equity funds are of mainly two categories.
- Active funds – Active funds are actively researched and managed by one or more fund managers. These can again be of various kinds like a) Large-cap or Blue-chip fund, b) Mid-cap fund, c) Small-cap fund, d) Multi-cap fund, e) Flexi-cap fund, f) ELSS or Tax saving fund and g) Thematic funds (pharma fund, banking fund, IT fund etc.)
- Index funds – Index-funds are not actively managed by any fund manager, but it follows a market index like Nifty 50, Sensex, Nifty Next 50, Nifty IT etc.
- Debt Funds – Debt funds invest money in fixed-return securities like Govt bonds, corporate bonds and other money-market instruments. These funds are low-risk low-return kind of things meant for capital protection. Again, there are different kinds of debt funds like a) Liquid fund, b) corporate bond fund, c) Govt. securities or Gilt fund, d) short-duration fund etc.
- Hybrid / Balanced Funds – Hybrid funds invest in both debt and equity instruments to balance the risk and returns.
How Much Return to Expect from Mutual Funds?
The return rates vary according to the fund category. You should not expect very high returns from mutual funds in the long term. Reasonable return rates that can be expected are –
- 12-15% in equity funds
- 8-10% in hybrid funds
- 3-6% in debt funds
Which Funds should you Invest in?
There is no one-size-fits-all kind of solution to this question. Everyone has different risk profiles and financial goals. So, it depends on your risk profile and time-horizon of your investment.
If you are a conservative (low-risk taking) investor, debt and hybrid funds are the way to go. Again, if you are an aggressive kind of investor, you should go with equity funds. The chart below shows the suggested fund options for different investment horizons.
Some Popular and Best-performing Funds
Just as a reference (no recommendation), I am adding here a short list of some of the most popular and well-performing equity funds.
- Canara Robeco Bluechip Fund Direct Growth (5 year annualised return: 15%)
- Parag Parikh Flexi-cap Fund Direct Growth (5 year annualised return: 18%)
- Quant Active Fund Direct Growth (5 year annualised return: 23%)
- PGIM India Midcap Opportunities Fund Direct Growth (5 year annualised return: 21%)
- Kotak Emerging Equity Fund Direct Growth (5 year annualised return: 17%)
- Axis Smallcap Fund Direct Growth (5 year annualised return: 21%)
- SBI Smallcap Fund Direct Growth (5 year annualised return: 20%)
- Nippon India Smallcap Fund Direct Growth (5 year annualised return: 19%)
How to Invest in Mutual Funds?
Now, there are two different ways to invest – lumpsum and SIP (systematic investment plan). Lumpsum (one-time) investments are good when the market is in a downtrend due to some reason like the Covid-19 period. Otherwise, it is always better to invest in a systematic way through monthly SIPs.
You can start your mutual fund SIP with as low as 500 rupees. In India and all over the world, many people have been able to achieve their financial goals by making SIP investments for a long period of 10-20 years.
You can invest in mutual funds both offline and online. You may visit an AMC’s office and fill in their form to invest in mutual funds. Alternatively, you can invest directly by vising the websites of the respective AMCs.
But nowadays, you can just download an aggregator app like Groww or Paytm Money and complete the KYC requirements. Once your account is active you can invest in any mutual fund scheme selecting from the thousands of different schemes listed on the apps. The benefit of investing through such an aggregator app is that they only lists direct funds (less commission) on their platforms and gives you the options to start, pause and stop your SIPs anytime. Icing on the cake, investing in mutual funds through these apps are completely free.
I hope I have been able to address your mutual fund related queries in this article. If you are still confused or have a personalised query, you can always ask us in our ‘Ask Question’ page.