Mutual funds have become one of the most popular investment options in India in recent years. By investing in a mutual fund, you can benefit from the expertise of professional fund managers and achieve diversification with a relatively small amount. In this article, we will discuss the various types of mutual funds available in India, understand how to evaluate funds, and explore systematic investment plans (SIPs) as an ideal way to build wealth over the long run.
Understanding types of mutual funds
There are various categories of mutual funds in India based on their underlying assets and investment objective. Knowing the different types will help you select funds aligned with your risk appetite and financial goals.
Equity funds
Equity mutual funds invest primarily in stocks and are ideal for long-term wealth creation. They offer higher returns potential but also come with higher risk. Based on their investment style and focus, equity funds can be further classified as large-cap, mid-cap, small-cap, sector, and thematic funds.
Debt funds
Debt mutual funds invest in fixed income instruments like bonds, debentures, commercial paper and government securities. They aim to provide regular income along with capital appreciation. Some common debt fund categories are liquid, short duration, income, gilt, corporate bond and banking & PSU funds. Debt funds are considered relatively less risky than equity funds.
Hybrid funds
Hybrid funds combine both equity and debt investments to provide an optimal balance of returns and risk mitigation. Their asset allocation is dynamic, changing based on market movements. Some hybrid categories are aggressive hybrid, balanced hybrid and conservative hybrid funds.
Solution-oriented funds
These funds cater to specific needs like retirement, children’s education or tax savings. Popular categories are equity savings, children’s plans, retirement funds, and ELSS (equity linked savings schemes).
Index funds
Index funds replicate the portfolio of a particular market index like Nifty 50 or Sensex. They are a low-cost alternative to actively managed funds as they are passively invested.
Evaluating mutual fund performance
Choosing the right mutual funds to build your portfolio is crucial. Some key metrics to evaluate fund performance include:
Returns: Check 1 year, 3 year and 5+ year annualized returns and compare against the category average.
Risk profile: Assess standard deviation and explore downside risk using metrics like maximum drawdown.
Consistency: Examine periods of negative returns and consistency in outperforming peers over long periods.
Expenses: Lower expense ratio means more money remains invested for your benefit.
Portfolio quality: Analyse top holdings, sector and market cap allocation.
Management quality: Consider fund manager track record, tenure and investment process/philosophy.
Independent platforms like Value Research provide detailed factsheets for easy fund comparison. Always invest only after thorough due diligence.
Using SIPs to gain from rupee cost averaging
Systematic investment plans or SIP allow you to invest small amounts regularly, usually monthly. The benefit lies in rupee cost averaging – you purchase more units when prices are low and fewer when high, averaging out your purchase cost over time.
SIPs are ideal for building long term wealth as they removetiming risks. You can start with as low as Rs. 500/month and increase it gradually. Most fund houses let you choose weekly, fortnightly or quarterly options too.
Automate your SIPs directly from your bank account for hassle-free investing. Stick to your SIPs through market ups and downs to maximise gains in the long run. This is a proven method followed by seasoned investors worldwide.
Making the most of your mutual fund journey
With patience and discipline, mutual funds can help grow your moneymulti-fold over 15-20 years and meet major life goals. Remember:
– Invest for the long haul with a minimum time horizon of 5 years.
– Maintain a balanced portfolio across categories based on your risk profile.
– Rebalance periodically to book profits and maintain ratios.
– Review funds annually and replace underperformers.
– Use SIPs for rupee cost averaging and automation.
– Consult professionals if required for advice tailored to your needs.
Mastering mutual funds requires learning, but the rewards are immense. Approached systematically over years, they offer the average Indian investor unmatched access to diversified investing and wealth creation opportunities in a cost-effective manner.
