Mutual funds investment has become a popular investment tool among the current generation of people to grow their wealth and achieve financial goals. It offers a convenient way to invest in a diversified portfolio of securities managed by professional fund managers. Due to its flexibility and benefits, more young individuals are opting for mutual fund investments as their 1st step toward building wealth. In this article, we provide an in-depth look at mutual funds, including their types, benefits, and also about the top 10 mutual funds of 2023.
What Are Mutual Funds?
A mutual fund is an investment avenue through which Asset Management Companies (AMC) pool money from multiple investors into a diversified portfolio of stocks, bonds, or other assets, and fund managers make investment decisions based on the fund’s objectives while managing these funds. Investing in mutual funds gives individuals the opportunity to invest in a variety of assets even with limited capital. The value of mutual funds is determined by the Net Asset Value (NAV) units.
Now let’s look at the types of mutual funds in brief.
Types of Mutual Funds:
- Equity Funds: These funds invest primarily in stocks and offer long-term capital appreciation potential. These funds pool money from multiple investors and invest them in different companies so they can be further categorized as large-cap, mid-cap, or small-cap funds based on the market capitalization of the companies they invest in. As this fund directly invests in various companies, the risk in equity funds is comparatively high.
- Debt Funds: Debt funds invest in fixed-income securities such as government bonds, corporate bonds, securities, treasury bills, and money market instruments. In contrast to equity funds, these funds are designed to generate stable income as well as to minimize the risk of investing so debt funds would be an ideal investment option for passive investors who are seeking a regular income.
- Balanced Funds: Balanced funds invest in a mix of both equity and debt securities. They offer a balanced approach to risk and return, providing potential for capital appreciation along with regular income. These funds are also known as hybrid funds. The ratio of equity and debt mix can be variable or fixed. These funds are suitable for investors who are ready to take risks and also who are looking for income at regular intervals.
- Index Funds: Index funds tend to have lower expense ratios compared to actively managed funds. There are no fund managers to manage the portfolio in index funds. The assets are passively managed by investing in the same securities as the index they track. An index fund aims to replicate the performance of an index, like the S&P 500 or the Dow Jones Industrial Average (DJIA).
- Sector Funds: Sector funds are theme-based funds in which the pooled amount is invested in a particular sector such as technology, healthcare, energy, and so on. These funds can be more volatile and carry higher risks but they can deliver good returns from various sectors.
Benefits of Mutual Funds:
- Diversification: Mutual funds allow investors to spread their invested money across a wide range of securities and other assets, reducing the impact of any single investment’s performance on the overall portfolio.
- Professional Management: Fund managers with expertise and experience in the financial markets manage mutual funds. They conduct research, analyze market trends, and make investment decisions on behalf of investors.
- Liquidity: Mutual funds are open-ended (i.e.) generally it is highly liquid. You can redeem your investments on any business day at the Net Asset Value (NAV) of the fund on a particular day. The redeemed amount will be credited to your registered bank account and this crediting period will vary for each fund type. Also, while redeeming, you may also have to check the exit load and expense ratio for the fund.
- Flexibility: Mutual funds offer various investment options, such as lump sum investments and systematic plans (SIP, STP, SWP). In lumpsum mode, you have to pay a surplus amount at the time of starting the investment. In Systematic plans, you can invest small amounts in regular frequencies (monthly/quarterly/half yearly/yearly). For a first-time investor, it is recommended to choose SIP as it requires only a minimal contribution in the frequency of their choice.
- Trnsparency: As mutual funds are registered under SEBI, AMCs are required to disclose their fund’s portfolio holdings, expenses, and performance regularly. This transparency enables investors to make informed decisions based on reliable information. Also, you can check your investment’s performance easily.
- Tax Benefits: In mutual funds, ELSS (i.e.) Equity LinkedIn Savings Scheme allows you to deduct tax of up to Rs. 1,50,000/- under section 80C. This tax benefit is applicable only under the old tax regime.
- Rupee cost averaging: As mentioned above, you can invest in mutual funds through the SIP mode. With SIP, the rupee cost averaging mechanism helps you to tackle market volatility. In simpler words, your SIP will buy more units while the market is low and buy fewer units while the market is high so this will help you to build your wealth effectively.
So now let’s look at some of the mutual funds that have been performing well in 2023
| Mutual Fund Scheme Name | Sector/Asset Class/Category |
| Parag Parikh Flexi Cap Fund-Reg(G) | Equity – Flexi Cap Fund |
| Axis Bluechip Fund-Reg(G) | Equity – Large Cap Fund |
| HDFC Flexi Cap Fund(G) | Equity – Flexi Cap Fund |
| Canara Rob Emerg Equities Fund-Reg(G) | Equity – Large & Mid Cap Fund |
| ICICI Pru Value Discovery Fund(G) | Equity – Value Fund |
| Mirae Asset Hybrid Equity Fund-Reg(G) | Hybrid – Aggressive Hybrid Fund |
| Mirae Asset Tax Saver Fund-Reg(G) | Equity – ELSS |
| DSP Quant Fund-Reg(G) | Equity – Thematic Fund – Other |
| Kotak Small Cap Fund(G) | Equity – Small cap Fund |
Source:/www.fundsindia.com/select-funds
Before starting an investment, you have to know a few pointers to be checked.
- Define your goals precisely.
- Analyze the various top funds(Performance, Diversification & other factors) and choose the fund that will be suitable for your goals.
- Determine the mode of investment, investment tenure, and frequency of investment(If systematic plans are chosen).
- Try to understand the expertise and experience of the fund manager and the AMC.
- Check whether the fund has any entry or exit load costs.
- Get an expert’s opinion before starting an investment.