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The market today is inundated with a host of mutual funds schemes and brands that offer them. Although most of them have similar looking offers, there can be crucial differences hidden in the fine prints. Also, there are several different kinds of mutual funds available in the market including debt, equity, hybrid, and others. All of these categories have varying features and benefits.This is why investing in a mutual fund can become very daunting for a new investor as well as an established one. Here are 7 essential tips that will guide you towards the best mutual funds to invest in.
1. List your Objectives
Making an investment is an extremely important decision of your life. It will have an impact on your future planning and the kind of corpus you will be left with to bring them to fruition. It is thus crucial to make a list of your priorities and objectives for making an investment. You must ascertain your end goal before taking the first step.For example, you want to take early retirement and travel the world without thinking about your finances. Then you must invest wisely for the next 20 years, a minimum of Rs 20,000 per month. This will leave you with approx. Rs. 1.9 Cr. at a rate of 12% return p.a. Similarly, your investment will differ for different objectives such as buying a house, car, child’s education, and marriage.
2. Deep Dive into the Mutual Funds’ Universe
Best mutual funds to invest in are categorised based on the asset class (i.e. bonds, stocks, cash), objective, strategy, or style. Learning about this classification will help you in choosing the best possible funds for investing. Typically, there are three types of mutual funds available in India:
- Large-cap funds
- Mid-cap funds
- Small-cap funds
- Sector funds or Thematic Funds
- Arbitrage fund
- Monthly Income Plans (MIPS)
- Short-term funds
- Gilt funds
- Liquid funds
- Income funds
- Fixed maturity plans
- Equity-oriented: When the equity exposure of the fund is 65% or more.
- Debt-oriented: When equity exposure is less than 65%.
- Equity Mutual Funds With predominant equity exposure, these fall in the high-risk category but also come with high return potential. Fund managers often do a risk-appetite assessment of the investor before advising them to invest in equity mutual funds.The popular subtypes in this category are:
- Debt Funds With a heavy debt exposure, it is best suited for investors who wish to avoid taking any high risks but at the same time get higher returns than regular instruments like FDs. However, the return potential is not the same as equity funds. These funds make use of debt instruments like corporate bonds, government bonds, and more.The most known debt funds are:
- Hybrid Funds These kinds of bonds bring together the best of both the worlds by investing in bonds and stocks. They have a dynamically balanced risk and rewards for their investors.They are further divided into:
3. Make an Assessment of Your Risk Appetite
Investment in all mutual funds is subjected to market risks. The thumb rule is the higher your risk the higher your reward will be. However, not all investors would like to play by this rule. It is then crucial to understand how much risk you would like to take. Known as risk appetite, it is determined by the mutual relationship of the following factors:
- Age
- Income
- Marital Status
- Number of Dependents
- Objectives and Goals
It is advisable to have a robust risk management plan in place.
4. Picking the Best Mutual Funds
As mentioned earlier, there are numerous mutual funds schemes available in the market that will try and sway you with the help of attractive benefits and features. Best will be to choose the one which will help you in achieving your financial objectives and goals keeping your risk appetite in mind. To do that you must do thorough research of all the schemes available based on the following parameters:
- Market ranking of the mutual fund
- Track record of the mutual fund
- Expense ratio
- Experience and performance record of the fund’s manager
- Quality of the Asset Management Company
- Asset Under Management
- Tax benefits of the fund
- Risks associated with the fund
- Duration of the investment
All these parameters must be taken in account before making investments. A good rating against all these parameters will ensure that you get what you want.
5. Tax Benefits
Government of India levies taxes on the capital gains and dividends earned via mutual funds. Investors must always make a note of the kind of tax cuts applicable on the mutual funds of their choosing and how they can make use of exemptions to prevent any considerable expense.In India there are two types of taxes levied on mutual funds:
| Type | Short-Term Gains | Long-term Gains | Short-term Capital Gain Tax | Long-term capital Gain Tax |
| Equity MF | Held for less than 12 months | Held for more than 12 months | 15% | 10% without indexation on gains above Rs 100,000 in a financial year. |
| Debt MF | Held for less than 36 months | Held for more than 36 months | Based on the income tax slab | 20% after indexation |
- Capital Gain Tax Any profit which is earned by selling or redeeming mutual funds is called a capital gain. Such profits are taxed by the government on the basis of their holding period.
- Tax on Dividends Dividends earned on the mutual fund are taxable at the hands of the investor. While earlier, Asset Management Companies (AMC) were supposed to deduct Dividend Distribution Tax (DDT) before paying out the dividends, now the investors have to pay the tax on dividends as per their tax slab in the year.
- Create a Diverse Portfolio When it comes to investing in mutual funds, it is best to not put all your money in any single fund. This increases the chances of incurring any unwanted losses in the future. To avoid such a scenario, maintain a diverse portfolio of various categories of mutual funds and divide your money wisely amongst them. This will ensure that even if you incur a loss with one, the profit from another fund will cover it. Also, it makes it easier to manage your investments efficiently.
6. Watch Closely
Once you have gone through all the hard work and invested your money in selected mutual funds, your job isn’t over. It is vital to keep a tab on your investments. Periodical inspection of the funds will tell you how each one of them is performing and if there is a need for some calibration.You will be able to ascertain which fund is performing better and which is slacking. This will help you in reallocating your investments from poorly performing assets into the ones which are performing well. Thus, ensuring that you are on track for meeting your financial goals and get good growth in your corpus.
7. Keep Your Finger on the Market’s Pulse
The investment market is a dynamic place which is always evolving. An investor who closely follows the market, about any upcoming investment opportunities or a change in policies, will be able to quickly adapt, make adjustments to his/her portfolio and make the most out of their investments.Build a Portfolio in Line With Your GoalsEvery penny that you invest carries along with it your dreams and goals as well. By adhering to these 7 tips, you can ensure that you can build a well-rounded portfolio that can help you achieve those goals. You can, additionally, consult a financial advisor to help you further secure your money and build a robust portfolio to select the best mutual funds to invest in.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
