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In India, more and more people are turning to mutual funds to grow their wealth. But with so many options available, the real challenge is how to choose top mutual fund in India for your needs. The right decision depends on factors like your investment horizon, risk tolerance and financial goals.
Selecting wisely can be a game changer for your financial future. Should you go for equity, debt or hybrid funds? Active or passive funds? How much are you willing to invest and how much risk can you handle? These are important questions when it comes to select best mutual fund in India.
In this blog, we’ll guide you step by step on how to select best mutual funds for investment in India and how to decide which mutual fund is best for your financial goals. By the end, you’ll have a clear idea of how to choose mutual funds in India that suit your needs and help you grow your wealth effectively.
What is a Mutual Fund?
Mutual fund is a way for investors to pool their money together, which is then managed by a professional fund manager. Fund manager invests this money in different assets like stocks, bonds or a mix of both, depending on the fund’s goal. Each investor owns units of the mutual fund, which represent their share in the overall portfolio.
Biggest advantage of mutual funds is it allow you to invest in a wide range of assets without having to buy them individually. In India, all mutual funds are regulated by SEBI, ensuring safety, transparency and protection for investors. This makes mutual funds one of the most convenient and reliable options.
Choosing a best mutual fund involves considering two main factors: First, you assess the factors related to the category of mutual fund you want to invest in and then you evaluate the specific factors of individual funds within that category. As shown in the chart below.
Factors to Consider Before Selecting Mutual Fund Category
When it comes how to select top mutual fund category there are a few key factors to consider that can make a big difference in reaching your financial goals.
- 1. Investment Goal
Before putting your money into any investment it’s important to figure out what you’re aiming for. Are you looking to make money over the long time or do you need regular income right now? Are you saving up for your kids’ college or planning for retirement? Defining your goal helps narrow down investment options out there. Your goal could be anything from buying a home or car to funding your children’s education or enjoying a comfortable retirement.
Once you know why you’re investing, it’s easier to select right type mutual fund. You might go for stocks or bonds or maybe a mix of both depending on what fits your goal.
For example, if your objective is to grow money over time you might opt for stocks. If saving on taxes is a priority you might look into options like tax saving mutual funds.
- 2. Time Horizon
Time horizon means how long you plan to keep your money invested in a mutual fund. It could be really short a day or longer over five years. The type of mutual fund that’s best for you depends on how long you want to invest.
If you are thinking short term like less than a year, you may go for liquid funds or ultra short duration funds. These are good for shorter time frames because they invest in things like short term debt.
If you’re thinking a few years between one to three years short duration funds could be a good fit.
For longer term goals of more than five years you might consider equity funds. These tend to have a higher potential for growth over time but can be more volatile in the short term.
When deciding how long to invest think about whether you might need your money soon. Keep in mind that mutual funds often have fees when you buy or sell them so it’s best to plan to hold onto your investment for at least five years to minimize these costs. What are mutual funds costs we will discuss later.
The market can be unpredictable in the short term but historically it has shown higher returns over longer periods. Here’s a quick overview of which types of mutual funds are better for different time horizons:
| Time Horizon | Mutual Fund |
|---|---|
|
1 day - 3 months |
Liquid Funds |
|
3 months - 1 year |
Ultra Short-duration Funds |
|
1 year - 3 years |
Short-duration Funds |
|
3 years - 5 years |
Hybrid/Balanced Funds |
|
More than 5 years |
Equity Fund |
- 3. Risk Appetite
When thinking about investing, it’s crucial to assess how comfortable you are with the possibility of your investment fluctuating in value. Are you someone who doesn’t mind taking risks or do you prefer to play it safe and stick with more stable options? Understanding your risk appetite is key to making informed investment decisions that align with your financial goals and personal preferences.
Considering the importance of assessing risk, SEBI mandated in 2015 that all mutual fund houses display a riskometer. This tool provides investors with a clear indication of the level of risk associated with their investment ranging from low to high. By understanding where you fall on this risk scale you can make more informed decisions about which investments are suitable for you.
- Equity mutual fund: If you invest in mutual funds that focus on stocks (equities) your investment might go through ups and downs because the stock market can be unpredictable. However over time you could potentially make a lot of money with these types of funds especially if you're willing to leave your money in for a long time and can handle some risk.
- Debt mutual funds: If you invest in mutual funds that focus on government bonds or corporate bonds (debt) your investment is likely to be more stable. But the trade off is that you might not make as much money compared to stocks.
Factors While Selecting A Mutual Fund Scheme
After you’ve figured out which type of mutual fund matches your investment goals, time frame and risk tolerance. Here is the time to pick a specific one within the various mutual fund schemes on the basis of the following factors:
Benchmarking Performance:
Comparing a mutual fund’s performance with its benchmark helps investors evaluate whether the fund is delivering returns in line with the market. It is important to review a fund’s performance over different time periods to understand how it behaves across various market conditions. If a fund consistently underperforms its benchmark over three, five, seven or ten years, it may not be a suitable investment option.
As per SEBI guidelines, mutual funds are required to use Total Returns Index (TRI) as their benchmark. Unlike simple price indices, TRI takes into account both stock price movements and dividends reinvested back into the fund, making it a more accurate measure of performance.
2. Performance vs Peer:
Assessing a mutual fund’s performance involves considering how it performs up against peer funds in the category. This comparison helps us understand how well the fund has performed overall. It’s important to compare large cap equity mutual funds with other large cap funds not mixing them up with mid cap or debt funds.
3. Performance Consistency
When choosing top mutual funds, it’s crucial to look beyond just high returns, consistency is key. It should be able to deliver steady returns even when the stock market is experiencing both upward and downward trends.
Let’s compare two funds. Fund A shows returns of 9%, 9.5% and 10% over three years. Fund B, displays returns of 12%, 1% and 5.5% during the same period. Fund A’s consistent performance makes it a better choice.
When evaluating a mutual fund’s track record it’s important to ask yourself a few key questions:
- Did the fund manager consistently match or outperform the overall market?
- Was the fund’s performance more stable compared to major market indexes?
- Did the fund have a high turnover rate, which could lead to increased costs and tax implications for investors?
4. Fund Manager Experience
When you choose a mutual fund, consider the experience of the fund manager. Look into how long they’ve been managing the fund you’re interested in as well as any other funds they currently manage or have managed in the past.
A fund manager plays a key role in a mutual fund’s performance. They decide where to invest the money and how to divide it among stocks or securities. An experienced manager can improve a weak fund, while an inefficient one can hurt returns. Checking a manager’s past record helps in choosing right mutual fund in India.
Today, tracking investments is simple. Through brokers, apps, or financial websites, you can easily monitor performance and portfolio updates.
5. Expense Ratio
Expense ratio of a mutual fund shows the fee charged by the fund’s managers for handling and running the fund. This fee covers various expenses like administration, management, advertising and distribution. SEBI sets a limit of 2.25% of the total fund assets for this figure. When you compare direct plans to regular plans direct plans usually have a lower expense ratio because they don’t pay distribution commissions. If the expense ratio is lower the mutual fund scheme tends to offer higher net returns.
Choose mutual funds with a lower expense ratio because even though the percentage might seem small but it can have a big impact when applied to your entire investment portfolio. The expense ratio depends on the Assets Under Management (AUM).
6. Entry and Exit Load
Entry load is the fee charged by fund houses when investors invest in a mutual fund, whereas exit load is the fee charged when investors redeem their investment within a short period.
This fee is to discourage quick exits and the immediate outflow of cash from fund houses. However, most fund houses have removed entry loads. As an investor it’s wise to choose mutual fund schemes with zero or minimal entry and exit loads.
7. Fund Size
When we talk about the size of a mutual fund we’re referring to how much money it manages. Some people believe that bigger funds are better but that’s not necessarily true. What really matters is the fund’s performance. If a smaller fund has a better track record than a larger one it may be a better choice for investors.
When a fund does well, more people may invest in it. But just because a fund is big doesn’t mean it’s best mutual funds. Investors should pay attention to how well the fund performs
8. Taxes
When you invest in stocks or mutual funds and earn money, you need to pay taxes on those earnings. The tax rate depends on how long you’ve held onto your investment. For listed equity shares and equity-oriented mutual funds, Long Term Capital Gains (holding period of 12 months or more) exceeding Rs 1.25 Lakh are taxed at 12.5%, while Short Term Capital Gains (less than 12 months) are taxed at 20%
Types of Mutual Funds
There are various types of mutual funds in India, some of which are mentioned below.
- Large cap funds: These funds invest in large well known companies that are worth at least $10 billion in the stock market.
- Small cap funds: They primarily target smaller companies, typically valued between $300 million and $2 billion in the market.
- Value funds: These funds look for undervalued stocks, meaning they're believed to be worth more than their current market price.
- Growth Funds: Growth funds invest in companies that are growing quickly aiming to increase their value over time. These funds often target companies with a high potential for long term capital appreciation even if they have a relatively high P/E ratio.
- Income Funds: These funds aim to provide regular income to investors through dividends or interest payments, they invest in dividend paying stocks.
- Tax Saving Mutual Funds (ELSS): These funds invest in equity and offer tax benefits under Section 80C of the Income Tax Act. They carry higher risk but can provide good returns if the fund performs well.
- Liquid Mutual Funds: These funds invest in short term securities like commercial papers and treasury bills, focusing on providing liquidity rather than high returns. They are low risk options suitable for short term investing needs.
- Diversification: Your money is spread across different stocks, bonds, or assets, which reduces the risk of loss compared to investing in a single security.
- Professional Management: Mutual funds are managed by experienced fund managers who research the market and make informed decisions to maximize returns.
- Liquidity: You can buy or sell most mutual funds anytime, giving you easy access to your money. This makes mutual funds more flexible than fixed deposits or other locked-in investments.
- Tax Benefits: Certain funds like Equity Linked Savings Schemes (ELSS) allow tax deductions under Section 80C of the Income Tax Act, helping you save while you invest.
- Affordability: You don’t need a large amount to start. With SIPs, you can begin investing with as little as ₹500 per month.
- Transparency: Mutual funds provide regular updates on performance, NAV, and portfolio holdings, so you always know where your money is invested.
- Regulated by SEBI: All mutual funds in India are regulated by SEBI, ensuring investor protection and fair practices.
- Wide Choice of Funds: From equity and debt to hybrid and index funds, there are different types of mutual funds in India to match your risk appetite and financial goals.
- Potential for Higher Returns: Over the long term, mutual funds especially equity funds can offer higher returns compared to traditional savings options like fixed deposits.
Final Words
Choosing top mutual fund is important to achieve your financial goals. To make the best decision, understand how mutual funds work and carefully assess factors like your investment objectives, risk tolerance, time horizon, fund performance, expense ratio, and the track record of the fund manager.
There is no single best mutual fund for everyone. Each investor’s needs are different, so it’s important to research well and match the fund with your personal financial goals. By selecting right mutual fund in India, you can build wealth over time and move closer to financial freedom.
FAQs on Top Mutual Funds in India
How to choose a best mutual fund to invest ?
To choose a top mutual fund in India, check your goals, risk tolerance, time horizon, historical return, fund manager and expense ratio.
Which is the safest mutual fund?
Debt funds and liquid funds are usually considered safer, offering stability with lower returns.
Which is the best mutual fund for beginners?
Beginners should explore index funds or balanced funds, If you are exploring best mutual funds. These funds are simple, low-cost and less risky.
Which mutual funds give the highest return?
Equity mutual funds often deliver higher returns over the long term but carry higher risk.
What fees do mutual funds charge?
Mutual funds charge include expense ratios, management fees and exit loads.
When to buy mutual funds?
There’s no perfect time. Consistent investing through SIPs is good focus more on goals and time horizon than timing markets.
What risks are involved while investing in mutual funds?
Risks include market volatility, interest rate changes, and credit risk.
