Choosing the Right Mutual Fund in India: Smart Tips for the Smart Investor
Posted on 17-Jun-2024
6 min read
Wondering how to choose the right mutual funds in India for your portfolio? Your search ends here. Read this guide by Shriram AMC to find answers to your queries.
Table of Content
All your research on mutual funds, their types, benefits, risks, returns, etc. boils down to just one thing—whether you are successful in choosing the right kind of mutual funds for your portfolio. It is this choice that determines your returns, exposure to risks, and the income or wealth that you’ll be able to generate for the long term.
And of course, there are multiple ways to go about making this selection. Analysing your risk tolerance, financing goals and investment style are just a few things to consider. That is why it is imperative to get your basics right before you can even think of jumping into mutual fund investments.
On that note, here’s a guide that will help you choose the right mutual funds in India and act as your stepping stone to the world of investments.
There are five broad categories of mutual funds in India. Let’s look at them one by one:
• Equity Funds: Invest primarily in stocks of companies, offering high growth potential but with higher risk due to market fluctuations. Examples include large-cap funds, mid-cap funds, small-cap funds.
• Debt Funds: Invest in fixed-income securities like bonds and debentures, offering lower risk and predictable returns. Examples include fixed deposit funds, income funds, gilt funds.
• Hybrid Funds: A mix of equity and debt, offering a balance between risk and return. Examples of these funds are balanced funds, balanced advantage funds, asset allocation funds.
• Solution-Oriented Funds: These are funds that can be further classified into retirement funds and children’s funds. Retirement funds have a minimum lock-in period of five years or the retirement age, whichever comes earlier. Children’s funds also have a minimum lock-in period of five years or 18 years of age, whichever comes earlier.
• Other Schemes: This is the final categorisation of mutual funds that consists of index funds/ETFs or Funds of Funds (FoF). Index funds invest in a minimum of 95 per cent of assets in the index it aims to replicate. FoFs invest in a minimum of 95 per cent of assets in the underlying funds.
• Expense Ratio: A percentage of assets deducted annually to cover fund management and operational costs. Lower expense ratios are generally preferred.
• Entry Load: A one-time fee charged by some funds for investing. Opt for "direct plans" with no entry load to save costs.
• Exit Load: A fee charged when you redeem your investment within a specific lock-in period.
• One-Time Charges: There is often a one-time transaction cost involved during the initial investment known as one-time or transaction charges.
• Account Fee: You also need to pay a small fee for the maintenance and upkeep of your account for mutual fund investments.
• Management Fee: Your fund manager is responsible for choosing the right funds for your portfolio and keep you updated about the returns. Therefore, it goes without saying that there is a fee associated with their hard work and skill, known as the management fee.
• Recurring Fee: Advise on portfolio, management and marketing are a few other elements that attract a recurring fee for your investments.
• Fund Switching Price: You might also have to pay a small fee in case you want to switch from one mutual fund to another.
• Distribution and Service Fee: The final kind of fee associated with mutual funds is the service fee that are often charged for marketing or emails from your chosen AMC.
Let us now take a closer look at the three main factors you need to keep at the back of your mind before choosing the right mutual fund for you:
• Investment Objective: What are you saving for? Retirement, child's education, or a down payment on a house? Each objective has a different time horizon and risk tolerance.
• Risk Appetite: How comfortable are you with market volatility? Higher potential returns come with higher risk.
• Investment Horizon: How long do you plan to stay invested? Long-term goals can handle higher equity allocation, while short-term goals may need debt funds for stability.
We have enlisted a few of these factors for your reference:
Mutual Fund Scheme Analysis
• Type of Mutual Fund: Equity, Debt, Hybrid, etc. Each category offers a different risk-return profile.
• Investment Strategy: Analyse the fund's investment philosophy and portfolio allocation. Does it align with your goals?
• Performance Track Record: Look at the fund's historical returns compared to its benchmark and category peers. Past performance is not a guarantee of future results, but it offers some insight.
• Fund Manager's Experience: Research the fund manager's experience and track record in managing similar funds.
Cost and Charges
As discussed in the previous segments, there are several costs associated with mutual fund investments, like expense ratio, entry and exit loads, etc. These costs vary with the type of mutual funds. Ensure you are aware of these costs before picking a suitable scheme.
Additional Considerations
• Fund Size and Liquidity: Larger funds tend to be more stable, while smaller funds might offer higher growth potential but with lower liquidity (ease of buying/selling).
• Tax Implications: Consider the tax implications of different fund types, especially for tax-saving goals.
• Investment Platform: Research different investment platforms for user-friendliness, investment options, and transaction fees. Investing through Shriram AMC not only ensures a seamless investment journey but also promises expert financial advice to help you make the right decisions.
• Step 1: Set up your account. This involves registering, completing KYC (Know Your Customer) verification, and linking your bank account.
• Step 2: Pick your investment. Decide which type of mutual fund scheme you want to invest in.
• Step 3: Choose how to invest. Decide whether to invest a lump sum all at once or set up a Systematic Investment Plan (SIP) for regular contributions. You can use an online SIP calculator to check your estimated returns.
Investing in mutual funds always come with inherent risks and volatilities. Therefore, if you are patient and not someone who easily panic-sells, mutual funds can be just the right investment avenue for you.
Finally, remember that choosing a mutual fund scheme requires careful consideration of your financial profile and the characteristics of the fund. Don't hesitate to consult a financial advisor for personalized guidance.
1. Is there any easy way to picking mutual funds?
While in-depth research is ideal, there are some easy ways to choose the right funds for you. Consider index funds that passively track a market index, offering diversification and lower expense ratios. Look for funds with a consistent track record and a reputable fund house.
2. How often should I review my mutual fund investments?
Regular reviews are essential. Ideally, review your portfolio annually or whenever your financial goals or risk tolerance change. Monitor the fund's performance compared to benchmarks and adjust your investments as needed.
3. What if the market crashes after I invest?
Market volatility is inevitable. A long-term investment horizon helps ride out short-term fluctuations. Stay calm, don't panic-sell, and focus on your investment goals.
4. Can I invest in multiple mutual funds?
Diversification is key. Consider investing in several funds across different asset classes and categories to spread your risk. This helps mitigate losses if a particular sector underperforms.
5. What are some resources to learn more about mutual funds?
Several resources are available. The AMFI (Association of Mutual Funds in India) website offers educational resources and investor guides. Financial publications and websites also provide valuable insights.
And of course, there are multiple ways to go about making this selection. Analysing your risk tolerance, financing goals and investment style are just a few things to consider. That is why it is imperative to get your basics right before you can even think of jumping into mutual fund investments.
On that note, here’s a guide that will help you choose the right mutual funds in India and act as your stepping stone to the world of investments.
Types of Mutual Funds
As we mentioned at the beginning, getting your basics right is the first and the most important step when choosing mutual funds in India. If you are new to this domain, this section will help you find your ground in the world of investing. And if you are already a pro at investing (why would you be on this page?), this discussion will help you revise the categories.There are five broad categories of mutual funds in India. Let’s look at them one by one:
• Equity Funds: Invest primarily in stocks of companies, offering high growth potential but with higher risk due to market fluctuations. Examples include large-cap funds, mid-cap funds, small-cap funds.
• Debt Funds: Invest in fixed-income securities like bonds and debentures, offering lower risk and predictable returns. Examples include fixed deposit funds, income funds, gilt funds.
• Hybrid Funds: A mix of equity and debt, offering a balance between risk and return. Examples of these funds are balanced funds, balanced advantage funds, asset allocation funds.
• Solution-Oriented Funds: These are funds that can be further classified into retirement funds and children’s funds. Retirement funds have a minimum lock-in period of five years or the retirement age, whichever comes earlier. Children’s funds also have a minimum lock-in period of five years or 18 years of age, whichever comes earlier.
• Other Schemes: This is the final categorisation of mutual funds that consists of index funds/ETFs or Funds of Funds (FoF). Index funds invest in a minimum of 95 per cent of assets in the index it aims to replicate. FoFs invest in a minimum of 95 per cent of assets in the underlying funds.
Different Investment Costs Associated with Mutual Funds
Investing in mutual funds is often a straightforward process, but there are associated costs that every investor must be aware of. Let’s learn all about them in this section:• Expense Ratio: A percentage of assets deducted annually to cover fund management and operational costs. Lower expense ratios are generally preferred.
• Entry Load: A one-time fee charged by some funds for investing. Opt for "direct plans" with no entry load to save costs.
• Exit Load: A fee charged when you redeem your investment within a specific lock-in period.
• One-Time Charges: There is often a one-time transaction cost involved during the initial investment known as one-time or transaction charges.
• Account Fee: You also need to pay a small fee for the maintenance and upkeep of your account for mutual fund investments.
• Management Fee: Your fund manager is responsible for choosing the right funds for your portfolio and keep you updated about the returns. Therefore, it goes without saying that there is a fee associated with their hard work and skill, known as the management fee.
• Recurring Fee: Advise on portfolio, management and marketing are a few other elements that attract a recurring fee for your investments.
• Fund Switching Price: You might also have to pay a small fee in case you want to switch from one mutual fund to another.
• Distribution and Service Fee: The final kind of fee associated with mutual funds is the service fee that are often charged for marketing or emails from your chosen AMC.
How to Choose Mutual Funds in India?
The beauty of having different categories of mutual funds is that it allows investors of all kinds to choose the category they think would suit their goals. From investors with a high risk appetite to those who aren’t willing to take any chances, when it comes to mutual funds, there is something for everyone.Let us now take a closer look at the three main factors you need to keep at the back of your mind before choosing the right mutual fund for you:
• Investment Objective: What are you saving for? Retirement, child's education, or a down payment on a house? Each objective has a different time horizon and risk tolerance.
• Risk Appetite: How comfortable are you with market volatility? Higher potential returns come with higher risk.
• Investment Horizon: How long do you plan to stay invested? Long-term goals can handle higher equity allocation, while short-term goals may need debt funds for stability.
| Choosing Mutual Funds Based on Investment Horizon | |
| Investment Duration | Type of Mutual Fund |
| 1 to 3 Years | Debt Funds |
| 3 to 5 Years | Hybrid Funds |
| 5 to 10+ Years | Equity Funds |
Factors to Consider While Choosing the Right Mutual Fund Scheme in India
We have covered the three broad categories that investors need to consider before venturing into the field of mutual fund investing. Similarly, there are also several other things to consider while choosing mutual fund schemes, besides just factoring in your risk profile, investment goals and horizon.We have enlisted a few of these factors for your reference:
Mutual Fund Scheme Analysis
• Type of Mutual Fund: Equity, Debt, Hybrid, etc. Each category offers a different risk-return profile.
• Investment Strategy: Analyse the fund's investment philosophy and portfolio allocation. Does it align with your goals?
• Performance Track Record: Look at the fund's historical returns compared to its benchmark and category peers. Past performance is not a guarantee of future results, but it offers some insight.
• Fund Manager's Experience: Research the fund manager's experience and track record in managing similar funds.
Cost and Charges
As discussed in the previous segments, there are several costs associated with mutual fund investments, like expense ratio, entry and exit loads, etc. These costs vary with the type of mutual funds. Ensure you are aware of these costs before picking a suitable scheme.
Additional Considerations
• Fund Size and Liquidity: Larger funds tend to be more stable, while smaller funds might offer higher growth potential but with lower liquidity (ease of buying/selling).
• Tax Implications: Consider the tax implications of different fund types, especially for tax-saving goals.
• Investment Platform: Research different investment platforms for user-friendliness, investment options, and transaction fees. Investing through Shriram AMC not only ensures a seamless investment journey but also promises expert financial advice to help you make the right decisions.
How to Invest in Mutual Funds through Shriram AMC
Investing in the mutual fund scheme of your choice through Shriram AMC is a simple three-step process. Here’s what you need to do:• Step 1: Set up your account. This involves registering, completing KYC (Know Your Customer) verification, and linking your bank account.
• Step 2: Pick your investment. Decide which type of mutual fund scheme you want to invest in.
• Step 3: Choose how to invest. Decide whether to invest a lump sum all at once or set up a Systematic Investment Plan (SIP) for regular contributions. You can use an online SIP calculator to check your estimated returns.
Conclusion
Before we wrap up this article, we would like to emphasise on this one bit. Always remember that mutual fund investments are not your get-rich-quickly scheme. There are no shortcuts. Mutual funds merely provide opportunities to build your wealth by exposing you to different investment vehicles offering you better return than the traditional ones, like Public Provident Fund (PPF), Fixed Deposit (FD), etc.Investing in mutual funds always come with inherent risks and volatilities. Therefore, if you are patient and not someone who easily panic-sells, mutual funds can be just the right investment avenue for you.
Finally, remember that choosing a mutual fund scheme requires careful consideration of your financial profile and the characteristics of the fund. Don't hesitate to consult a financial advisor for personalized guidance.
FAQs
Here are a few frequently asked questions about choosing the right mutual funds in India:1. Is there any easy way to picking mutual funds?
While in-depth research is ideal, there are some easy ways to choose the right funds for you. Consider index funds that passively track a market index, offering diversification and lower expense ratios. Look for funds with a consistent track record and a reputable fund house.
2. How often should I review my mutual fund investments?
Regular reviews are essential. Ideally, review your portfolio annually or whenever your financial goals or risk tolerance change. Monitor the fund's performance compared to benchmarks and adjust your investments as needed.
3. What if the market crashes after I invest?
Market volatility is inevitable. A long-term investment horizon helps ride out short-term fluctuations. Stay calm, don't panic-sell, and focus on your investment goals.
4. Can I invest in multiple mutual funds?
Diversification is key. Consider investing in several funds across different asset classes and categories to spread your risk. This helps mitigate losses if a particular sector underperforms.
5. What are some resources to learn more about mutual funds?
Several resources are available. The AMFI (Association of Mutual Funds in India) website offers educational resources and investor guides. Financial publications and websites also provide valuable insights.
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