Mutual funds have become popular in the past two decades. However, as an investment option, it has existed for long in India but known as ULIP. Unit Trust of India (UTI) was the nation’s first mutual fund funded in 1963 and was the most significant player until its demise in 2001.
Mutual funds manage investments on behalf of a large number of customers, often running into millions. They employ expert teams consisting of analysts, economists, and portfolio managers who take the headache of investing away.
When you buy into mutual funds investment in India, you no longer have to worry about checking your portfolio of shares and wondering if you should sell a stock because the business is not doing well.
While investing in a mutual fund is common sense, how do you choose a fund? At any time, there are about 2,000 active funds in India. We provide a detailed guide.
Mutual Fund Category
Two factors decide the category –
● Risk Appetite – Mutual funds investment in India depends on the risk that you are willing to take. Low risk means debt funds; high risk would lead to equity funds. If you are quite young and want your wealth to multiply, you would look at those equity funds that grow fast, e.g., technology funds. If you wish to receive assured returns at age 50, then the better investment option is FMCG and consumer durables companies.
● Time Horizon – Some mutual funds investment carry a lock-in period between 1-3 years. Such funds are not suitable for investments with a short horizon but financial goals far in the future. Liquid funds provide lesser returns but can be dissolved within a week if needed.
What is the reason behind buying mutual funds investment plans? You have to be able to determine your end goal, e.g., a SIP of INR 3,000 every month for children’s college education after 10 years. This would tell you about your risk appetite and time horizon.
Hence there are:
● Three possible risk profiles (usually) – low (debt), high (equity), medium (balanced)
● Three possible time horizons – liquid (can be dissolved in few weeks), illiquid (has a lock-in period), medium-term (1-3 years)
Factors For Choosing Mutual Fund
Once you know the category of funds you wish to buy into, for example – medium risk (balanced between debt and equity) and long term (above 5 years), you can select between different schemes.
Narrow down 5-6 mutual funds investment plans. Such as the best medium risk and long term funds would be:
● DSP Equity & Bond Fund
● ICICI Prudential Equity and Debt Fund – Direct Plan-Growth
● HDFC Retirement Savings Fund – Hybrid Equity Plan Direct-Growth
● Tata Retirement Savings Fund Moderate Plan Direct-Growth
● SBI Equity Hybrid Fund
● Principal Hybrid Equity Fund
Now decide based on:
● Load – Entry and Exit loads are the percent that the mutual fund charge at the time of entry and exit. Thus, a fund with 1% entry and 0.5% exit load invest INR 99 for every INR 100 you give them. Due to a 0.5% exit load, you would receive INR 99.50 for every INR 100 due to you.
● Administrative Charges – Every year, the mutual fund charge an administration fee. The entry and exit load pay for the fund profits while the administration charge is for its management, basically to pay the salary of the team of experts.
● Reputation – Some banks and NBFCs are well known for mutual funds investment. They are reputed since they have all the proper checks and balances in place so that the fund does not collapse (like UTI did in 2001). The more prominent funds are also able to attract the best analysts by paying huge salaries and bonuses.
● NAV – An old scheme that is well-known is NAV running into thousands of rupees. A relatively new plan that does not have a track record will have less NAV and be more affordable.
● Returns – Compare the returns of past 12, 36, and 60 months to find, which is the most consistent. This has to be seen against the market. In a rising market, most funds can record growth of 8%. It is the performance in a falling market that matters most.
Buying a mutual fund is a complex topic. Not as complicated as shares, but your requirements have to be sorted out before you can select and invest. Most investors choose to go by brand name and returns over the past 5 years.
Whatever be your strategy, think well, reflect, and postpone buying until you have done exhaustive research.