How to Choose the Best Performing Mutual Funds?

Mutual fund investment is becoming a preferred option for many even with a low budget. However, choosing the right investment strategy is key. Mentioned below are a few points to keep in mind when investing in mutual funds with low budget.

Keeping your goal in mind is very important irrespective of the money you are investing. Many beginner investors opine that they don’t have to set short-term or long-term goals if they’re starting with a small amount. However, it is essential to identify your financial goals to ensure your investment decision is in line with these goals. Once you have your goals, you can determine the amount of money you need to invest or re-work on your goals to match your investment corpus.

When you’re investing, you’ll have to first select the broad category of funds before zeroing-in your favourite fund. There are 3 categories of mutual funds broadly;

1. Equity Funds These funds invest most of its corpus in equity and equity-related instruments. Here are some popular types of equity funds;
2. Debt Funds These funds invest a heavy portion of its corpus in debts, bonds, government securities, etc., generating predictable returns for its investors. Some popular type of debt funds are;
3. Hybrid Funds These funds invest in both equities and debts in varying proportions. Based on the ratio of equity and debt investment, they can be classified into

Choosing the type of fund would depend on your goal, your investment corpus and other factors such as your risk level which we’ll discuss next.

Once you know your goals, the next step is to determine your risk-taking capacity. Investments can be divided into three risk categories broadly;

1. High-Risk Funds These funds usually provide high-return potential but also come with high risks. Usually, equity funds such as small-cap funds, thematic or sector funds fall in this category.
2. Medium Risk Funds These funds come with relatively lesser risks but also with lesser return potential. Equity funds such as large-cap funds, index funds, etc., fall in this category.
3. Low-Risk Funds These funds are known for their low-risk level but also come with lesser return potential. Usually, debt funds are a preferred choice for such investors.

As a rule of thumb, a high-return potential is often complemented by high-risk level and vice-versa. Thus, as an investor with a low budget, it is essential to match your risk level with your financial goals.

New investors, especially with a limited budget, often make the mistake of miscalculating their liquidity needs in the near future which might make them choose the wrong fund. Apart from keeping your investment money and liquid money separate, it is essential to plan well. Based on your liquidity needs, you can choose the right type of fund.

• Equity Funds These are known to perform best when you keep a long-term horizon of 3-5 years or more.
• Debt Funds These are better suited in case you expect upcoming expenses for which you plan to liquidate your fund in the near future.

If you’re investing a small amount, it is essential to choose a fund that helps you build a well-rounded portfolio from the start. Avoid thematic or sector funds that let you focus on a particular theme or sector. Funds such as multi-cap fund will help you build a well-diversified portfolio. However, make sure you check the past performance record to identify the best performing mutual funds in any category that you choose.

A lot of investors have a myth that investing in mutual funds is only for those with a good corpus. With the help of Systematic Investment Plans (SIPs), you can start as small as Rs 500 per month and build a good portfolio. The advantage of this tool over the lump-sum investment is that it does not put a burden on your finances. Starting early and starting small is the mantra to build a robust portfolio. SIPs come with many other advantages too such as rupee cost averaging, flexibility, etc.

When the investment amount is low, every penny counts. Do factor-in the taxation before you invest. The taxation on your fund would depend on the asset allocation of the fund and the duration for which you held the fund.

If it’s your first fund and you also want to save tax, an advised option is to go for ELSS funds. These funds come with added tax benefits. Investments up to Rs 1.5 lakhs in these funds are deductible from the taxable income under section 80C. Moreover, being equity funds and a mandatory lock-in period of 3 years, it enjoys long-term capital gain tax rules applicable to the equity fund.

Investment is not about going big. In fact, it is about starting small and starting early. Lowbudget, should not deter you from reaching your financial goals. Follow this guide and begin your investment journey. If you’re confused, consult an investment specialist or an expert from a reputable Asset Management Company (AMC), to zero-in on the best performing mutual funds .

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.