Best Mutual Funds Investment in India

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Introduction

Basics of Mutual Funds:

Mutual funds are among the best investments in India for long term wealth building which can be clearly seen in the historical performance of various mutual fund schemes. However, not all the investors who invest in mutual funds make money, simply because they only look at historical performance of the schemes and determine them as the best mutual funds in India without understanding the risk.

Investing in mutual funds does not really work like that. The best mutual funds in India are determined through a lot of research and can vary for person to person depending their risk appetite, financial goals, income and other factors.

To help you become an expert investor, here is quick guide to learn the basics of mutual funds before you start investing:

Define

What are Mutual Funds?

Mutual funds are a professionally managed investment vehicle which allows you to invest in debt instruments, real estates, gold, silver, equities and other financial instruments through pooling of funds from several investors. The gains or losses are shared amongst the investors in the proportion of their share of investments.

8 AMAZING FEATURES

Why Mutual Funds are the best investments in India?

Investing in mutual funds rank as one of the best investments in India as it offers an easy and cost-effective way to fulfil most of your financial goals in life. Financial goals can be saving on taxes, long-term wealth creation, periodic income post retirement, creating emergency funds for short term liquidity, etc.

However, not all the mutual funds schemes may fulfil each of these goals. You will have to know the characteristics and objective of each mutual fund to make sure it fits your financial goal. And at times, you might have to choose a combination of several schemes to meet a goal as well. For example – if you are looking for tax saving investments then you should choose ELSS schemes which are also called as tax saving mutual funds, investments in these tax saving mutual funds get the tax exemption under section 80C of the Income Tax Act. Or if your goal is to create a short-term emergency fund then you can choose a debt funds like Liquid funds, short duration funds, etc.

We will learn about the different types of mutual funds in a little while, right now let’s discuss the advantages of investing in best mutual funds in India :

Diversification

Investing in mutual funds reduces the unsystematic risk in your Portfolios by diversification of investments in different financial assets at the lowest possible investment amount.

Affordability

Investing in mutual funds can be done with as little as ₹100 which makes it affordable for people who cannot afford making large investments in assets like real estate, gold, stocks, etc.

Liquidity

You can redeem your Mutual fund investments easily and quickly. However, do note that this is not applicable in a lock-in scheme or schemes with pre-exit penalties and high exit loads.

Flexible

Mutual funds provide the flexibility in choosing your investment style – SIP or Lumpsum, Big or Small, Lock in or No Lock in, etc. You get flexibility in changing the schemes at any time as per T&Cs.

Expert Management

Your investments in a Mutual Fund scheme are managed by a very experienced and highly educated Fund Manager which makes it a perfect investment solution for novice investors.

Economies of Scale

Mutual funds deal in very high volume of transactions and hence they receive several concessions and reduced fees which are passed on to the investors, thus benefitting your cost to invest.

Generate Higher Returns

If you compare the historical returns of mutual funds in India to other traditional investments like FD, RD, etc you can see that mutual funds have outperformed all others.

Well Regulated in India

AMCs and their subsidiaries managing various operations of mutual funds in India are regulated by SEBI, RBI and Indian Trusts Act, 1882 which ensures protection of investor’s interest.

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How to start online mutual funds investment in India?

You can start online mutual funds investment in India with us by getting your account opened in 4 simple steps:

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Once, you account is opened, you can start the online mutual funds investment in India with us on webportal, mobile app or by contacting us to place your orders.

CLASSIFICATION METHODOLGY

What are the types of mutual funds in India?

There are over a thousand mutual fund schemes available in India today. Each of these schemes differs from one another based on its Management style, Fund Structure and Investment Universe.

Hence, one of the most important topics under basics of mutual fund is to know the different types of mutual funds. This would help in determing the best investments in India for us.

CLASSIFICATION 1

Types of Mutual funds based on Management Style:

Active Funds

The Fund manager for these types of mutual funds has the flexibility in choosing the investment portfolio, within the broad parameters of the investment objective of the scheme.

Advantage – Investors usually expect Fund Managers of these mutual funds to offer returns better than the market.
Disadvantage – They have a higher expense ratio.

Passive Funds

The Fund Managers for these types of mutual funds simply track and invest in the components of benchmark index (eg: Nifty, S&P, etc) and therefore are also known as Index funds.

The fund managers of these mutual fund schemes have no role in deciding instruments to invest in.

Advantage – They have a lower expense ratio.
Disadvantage – Investors make returns in line with the benchmark index.

CLASSIFICATION 2

Types of Mutual funds based on Fund Structure:

Open-Ended Funds

In these types of mutual funds, the investors are allowed to buy and sell their mutual fund scheme units at any time. Also, a new investor can buy units at any time from the AMCs.

The key feature of these funds is that even if some investors decide to exit from the scheme, it will still continue operations with the remaining investors.

Whenever a new or old investor invests money in these funds, new units would be created and thus the unit balance would increase.
And when investors sell their units back to AMC, the units are cancelled, this reduces the unit capital.

Close-Ended Funds

In these types of mutual funds, the investors are allowed to buy the mutual fund scheme units only during its NFO. No new units can be purchased by the investors who didn’t apply for the NFOs.

The key feature of these funds is that they have a fixed maturity. At the end of its maturity, the scheme is wound up and all units are cancelled and the funds are returned back to the investors.

In India, as per SEBI guidelines, it is compulsory to have these types of mutual fund schemes listed on a stock exchange, where the unit holder can sell his units to a potential buyer. This feature offers liquidity to the investors.
The unit capital in these funds remains the same all the time until maturity as no new units are created or existing units get canceled before maturity.
It’s also important to note that market price available for the units of such mutual fund schemes on the Exchange is usually lower than the NAV.

Interval Funds

These types of mutual funds have the features of both the open-ended funds and close-ended funds. It is largely a close-ended scheme but becomes open-ended for a predetermined time interval for allowing the existing unit holders to redeem their mutual fund scheme units and exit the scheme before its maturity. Once, the interval period is over the scheme will be again locked until maturity with remainder units.

In India, as per SEBI guidelines, it is compulsory to have these types of mutual fund schemes listed on a stock exchange, where the unit holder can sell his units to a potential buyer. This feature offers liquidity to the investors.
It’s also important to note that market price available for the units of such mutual fund schemes on the Exchange is usually lower than the NAV.

CLASSIFICATION 3

Types of Mutual funds based on Investment Universe:

Equity Mutual Funds

These types of mutual funds invest major portion of its AUM in equity-related securities.

Under Equity funds:

Contra Funds/Value Funds – Contra Investing is selecting stocks which are under-performing at the time of purchase with expectations of future performance. Value Investing is selecting stocks of good fundamentals at cheap price with expectation of future
Dividend Yield Funds – Investing in stocks of companies that have a history of providing regular dividends.
ELSS – A tax saving mutual funds scheme providing Income tax benefits under section 80C to investors for holding their investments for up to 3 years.
Flexi Cap/ Multi Cap Funds – Investing in stocks of large cap, mid cap or small cap companies with no restrictions on Fund Managers on stock selection.
Focused Funds – Investing in a maximum of 30 companies but the schemes have to clearly mention where it intends to focus: small cap, mid cap or the large cap.
Large & Mid Cap Funds – Investing in stocks of both large and mid-cap companies.
Large Cap Funds – Maximum Portfolio invested in stocks of large-cap companies.
Mid Cap Funds – Maximum Portfolio invested in stocks of mid-cap companies.
Sectoral: Auto – Maximum Portfolio invested in stocks of Auto sector companies.
Sectoral: Banking – Maximum Portfolio invested in stocks of Banking sector companies.
Sectoral: Diversified – Investing in stocks of all major industries and sectors.
Sectoral: FMCG – Maximum Portfolio invested in stocks of FMCG sector companies.
Sectoral: Foreign Equity – Maximum Portfolio invested in stocks of foreign companies.
Sectoral: Infotech – Maximum Portfolio invested in stocks of Infotech sector companies.
Sectoral: Pharma – Maximum Portfolio invested in stocks of Pharma sector companies.
Small Cap Funds – Maximum Portfolio invested in stocks of small cap companies.

Debt Mutual Funds

These types of mutual funds invest major portion of its AUM in debt or fixed income securities.

Under Debt funds:

Banking and PSU Funds – The debt scheme which predominantly invests in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds.
Corporate Bond Funds – The debt scheme which invests in AA+ and above rated corporate bonds.
Credit Risk Funds – The debt scheme which invests in AA or lower rated corporate bonds.
Dynamic Bonds – The debt scheme which invests in bonds of multiple maturity.
Floater Funds – The debt scheme which predominantly invests in floating rate instruments.
Gilt Funds – The debt scheme which invests in government securities of multiple maturity.
Gilt Fund with 10-year Constant duration – The debt scheme which invests in government securities having constant maturity of 10 years.
Long Duration Funds – The scheme invests in debt and money market securities having maturity of more than 7 years.
Liquid Funds – The scheme invests in debt and money market securities with maturity of up to 91 days.
Low Duration Funds – The scheme invests in debt and money market securities having maturity of 6 to 12 months.
Medium Duration Funds – The scheme invests in debt and money market securities having maturity of 3 to 4 years.
Medium to Long Duration Funds – The scheme invests in debt and money market securities having maturity of 4 to 7 years.
Money Market Funds – The scheme invests in money market securities, maturity of up to 1 year.
Overnight Funds – The scheme invests in overnight securities, maturity of 1 day.
Short Duration Funds – The scheme invests in debt and money market securities having maturity of 1 to 3 years.
Ultra-Short Duration Funds – The scheme invests in debt and money market securities having maturity of 3 to 6 months.

Hybrid Mutual Funds

These types of mutual funds invest portion of its AUM in both equity amd debt.

Under Hybrid Funds:

Aggressive Hybrid Funds – These schemes invest 65% to 80% of total funds in equity and equity related instruments and 20% to 35% in debt instruments.
Arbitrage Funds – These schemes invest in arbitrage opportunities of debt and equity instruments.
Conservative Hybrid Funds – These schemes invest 10% to 25% of total funds in equity and equity related instruments and 75% to 90% in debt instruments.
Balanced Hybrid Funds – These schemes invest 40% to 60% of total funds in equity and equity related instruments and 40% to 60% in debt instruments.
Dynamic Asset Allocation or Balanced Advantage Funds – These mutual fund schemes manage the investments in equity and debt dynamically based on prevailing market conditions.
Equity Savings Funds – Investment in equity, debt and arbitrage is managed simultaneously.
Multi Asset Allocation Funds – These schemes invest in at least three asset classes with a minimum allocation of at least 10 percent in each.

Solution Oriented Mutual Funds

These types of mutual funds invest its AUM in different assets in varying proportion to meet a financial goal of investors.

Under Solution Oriented Funds:

Children’s Funds – These schemes are designed for the purpose of building a corpus for the child and their needs in the upcoming years. They have a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier).
Retirement Funds – These schemes are designed for the purpose of building a corpus for retirement. They have a lock-in for at least 5 years or till the age of retirement (whichever is earlier).

Other Funds

These type of mutual funds include several ETFs, Funds of Fund, Overseas fund and index funds.

ETFs – These schemes invest in assets by replicating/tracking a specific index.
Fund of Funds (Overseas/Domestic) – These schemes invest in other mutual fund schemes.
Fixed Maturity Plan – These are close-ended debt funds where the duration of the investment is closely aligned to the maturity of the scheme.
Capital Protection Funds – These are close-ended hybrid funds where exposure is taken in equity through the derivative segment. Maximum investments are made in debt instruments for regular income and only a small amount is used for equity exposure through the derivative segment for better gains.
Real Estate Funds – These mutual fund schemes invest directly or indirectly in real estate assets or other permissible assets in accordance with the SEBI (Mutual Funds) Regulations, 1996.
Smart Beta Funds – These are an extension of Index funds/ETFs in which the basis of investment in Index is done through alternate strategies like having equal weightage of all assets of the index, etc. The smart beta funds are expected to improve returns by increasing diversification and reducing risk.
Quant Funds – They rely on data provided and analyzed by machines for selection of securities to invest in. Thus, takes out the human element in decision making.

Selection criteria

What are the best mutual funds in India to invest?

Depending on your risk appetite, return expectation and tenure for the goal, you can pick the best mutual funds in India to invest. Do note that, there is no single mutual fund we can term as the best mutual fund in India, as risk appetite and return expectation can vary person to person.

You can refer to the examples below to understand the selection criteria under the basics of mutual funds:

Example based on risk appetite:

If two individuals are looking for best investments in India whose age are 25 years and 60 years respectively, only on the basis of their age, we can recommend: high risk equity mutual funds would be the best mutual funds in India for 25-year-old and a low-risk debt mutual fund to 60-year-old. Our basis of recommendation is on the assumption that young individuals can take a higher risk for higher returns as they have several working years left in their life, while a person in his late 50’s might not be comfortable taking risk as they are close to retirement and would prefer regular periodic returns.

Example based on time horizon:

You can have multiple goals in life, based on the time horizon of each goal the mutual fund investments can be made. For example, you want to create a savings for your child’s higher education which will be required 10 years from today and you want to buy a new car in the next 3 years. For goals maturing sooner the best mutual funds to invest are low-volatile debt funds whereas for long-term goals one can invest in moderate high risk equity mutual funds. This is on the assumption that equities over a longer time frame are more profitable than other instruments as volatility is adjusted with time.

Example based on Investment objective:

You may plan on two or more financial goals which can be maturing in the same tenure. For example, you want to save on taxes and buy a new car in the next 3 years. In this case, the best mutual funds to invest shall be a combination of two different mutual funds where one portion of your total investable amount can be invested in tax saving equity mutual funds (ELSS) and the other portion in debt funds to buy a new car.

RISK and return payoff

Compare Mutual Funds in India based on risk:

While choosing the best mutual funds in India, you should compare the risk to reward before investing.

Remember – Higher the risk, higher the returns.

Below are some important risk factors to consider when you compare mutual funds in India:

Standard Risk Factors:

Mutual funds do not provide guaranteed or assured returns.
Some of the risks involved in mutual fund investment are trading volumes, settlement risk, liquidity risk and default risk.
You should also remember that mutual funds investments can also lead to loss of principal invested if exited at inappropriate time as the price / value / interest rates of the securities in which the scheme invests fluctuates, the value of investment in a mutual fund may go up or down.
Other factors that can affect mutual fund NAV are interest rates, currency exchange rates, changes in Government policies, taxation, and increased volatility in the stock and bond markets.
Past performance does not guarantee future performance of any Mutual fund.

Specific Risk Factors:

Investment in Equities:

Volatility and Price Risk – Investment in equity mutual funds are subject to volatility which are caused due to demand and supply of equities in the stock market which causes price fluctuations in the units of mutual fund too.
Liquidity Risk – The investments in certain equities may not be liquid in nature due to lower trading volumes which makes it difficult to get buyers during redemption.
Event Risk – Price risk due to company or sector specific event.

Investment in Debt and Money Market instruments:

Interest Rate Risk – Price of debt and money market instruments are inversely related to interest rate. Hence, when interest rate falls, the price of these instruments rises and vice versa. This affects the returns you can generate from your investments.
Credit Risk or Counterparty Risk – When a debt instrument is issued by a company, the returns are earned only if the company continues to make the interest and principal payment. Hence, if for any reason the company goes bankrupt or is unable to pay the interest or principal, you would suffer a loss.
Spread Risk – A wide spread in bid and ask prices can cause the investments to occur loss at the time of redemption.
Liquidity Risk – The instrument may have a lock-in or difficult to redeem due to lower trading volume.
Prepayment Risk – If the company borrowing the debt prepays the principal before maturity, the investor could the interest that could have been earned on their investments.

Below is the list of key financial ratios that would help you to compare mutual funds in India based on their performance:

Key Performance Ratios
Ratios	Description
Expense Ratio	Measures the total cost of managing a mutual fund and impacts your net returns.
Beta	Measures the volatility of the mutual fund compared to the benchmark.
Portfolio Turnover Ratio	Represents the percentage change of total mutual fund's holdings over 12 months.
Risk Ratios: Standard Deviation:	Standard deviation is directly proportional to the overall volatility of the scheme's returns compared to its average, and it shows how much risk the fund has exposed its investors to.
Sharpe Ratio	Measures the mutual fund's performance against the overall risk taken.
Sortino Ratio	It is a variation of the Sharpe ratio that only factors the downside risk into consideration.

You can refer the risk to return hierarchy to compare mutual funds in India based on risk:

Risk to Return Hierarchy
Mutual Fund Category	Level of Risk
1. Investment Universe:	Liquid funds < Debt funds < Hybrid funds < Equity funds
2. Equity Mutual Funds:	Large Cap funds < Large & Mid Cap funds < Multi-cap funds < Mid-cap funds < Small Cap funds
3. Diversified to Concentrated Funds:	Diversified funds < Focused funds < Thematic funds < Sector funds
4. Hybrid Mutual Funds:	Arbitrage funds < Equity Savings funds < Conservative Hybrid fund < Dynamic Asset allocation fund < Multi Asset Allocation fund < Balanced Hybrid funds < Aggressive Hybrid funds
5. Debt funds:	Overnight funds < Liquid Funds < Ultra Short Duration funds < Low Duration funds < Medium Duration funds < Long Duration funds
6. Credit risk in debt funds:	Gilt funds < Banking & PSU funds < Corporate Bonds fund < Credit risk funds

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