- Date : 13/06/2022
- Read: 5 mins
While the Indian mutual fund industry has grown significantly over the last 10 years, investors continue to seek for the ‘best’ mutual fund to invest in. But what might be best for one, may not work for another, which is why it’s imperative to understand what works for you. And that depends on your risk-taking appetite, and your investment period. Here’s how to choose the best mutual fund for you.
The Indian mutual fund industry has been growing steadily since the past decade, with the average assets under management (AAUM) increasing from Rs. 6.8 trillion in April 2012 to Rs. 38.04 trillion in April 2022. That’s more than a five-fold increase in 10 years. The total number of folios or accounts have also increased in 2022, with over 13.13 crore accounts compare to 10 crore folios in May 2021.
With increased investment in mutual funds, comes increased searches for the “best mutual funds to invest in India”. It’s a query that’s often posed to seasoned investors, or experts. But the answer isn’t as straightforward. While there may be lists on several sites of the best mutual funds, chances exist that they might be based on a flawed methodology.
Which brings us to - what is the best mutual fund for you?
And this is where the answers begin to emerge. A major chunk of the act of investing depends on the temperament of the investor. To understand how that works we must first look at the type of mutual funds on offer.
1. Equity schemes
Equity mutual funds invest at least 65% of the total funds into equity shares of companies. Under this, there are large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, sector funds, index funds, and ELSS funds. The main differentiator being the market capitalisation, and specific sectors or market indices.
Also read: Best Equity Mutual Funds To Invest In India
2. Debt schemes
Here 65% of the funds are allocated to debt and fixed-income instruments. These are relatively lower-risk investment options that include liquid funds, dynamic bond funds, short-term debt funds, fixed maturity plan funds, gilt funds, and credit opportunity funds.
Also read: Best Debt Mutual Funds To Invest In India
3. Hybrid schemes
This is a balance of equity and debt funds to balance out the risks and rewards. Some funds may be aggressive hybrid funds (more allocation towards equity), whereas some may be conservative hybrid funds (wherein the majority of funds is allocated towards debt instruments).
Also read: What Are Hybrid Funds?
What is your risk appetite?
Younger investors generally tend to have a larger appetite for risk, given their earning potential coupled with lower financial liabilities. Older investors, alternatively, have a lower risk appetite, preferring the relatively modest but likely returns of debt of conservative hybrid schemes.
So, what is best for you?
For new investors, aggressive hybrid schemes are ideal especially in the context of long-term wealth creation. However, mutual fund schemes are subject to market volatility, which is why staying invested for at least two years, if not more, can create significant confidence in remaining invested further.
For young investors looking to avoid the stress of market volatility, conservative hybrid funds may be the right answer for you. The returns will be modest, but you can then shorten the investment period without worrying about potential losses, should you need liquidity in the immediate future.
Furthermore, large cap schemes offer more stability, and less risk to safe investors, while also providing relatively lower returns. Those with a stronger risk appetite can look to invest in small to mid-cap funds, or invest in a particular sector fund – from a sector that is expected to grow rapidly in the near future.
With these pointers in mind, here’s a list of best performing mutual funds that have returned over 20% in the past year or so, keeping in mind the variance in risk appetite:
1. Quant Small Cap Fund Direct Plan Growth
Providing annualised returns of over 38.20% over a 3-year period, it is an aggressive, high-risk fund that predominantly invests in equity.
2. ICICI Prudential Technology Direct Plan Growth
Yet another high-risk, equity-dominated fund that has delivered 33.71% returns over a 3-year period. Furthermore, it is focused on the technology sector.
3. Sundaram Equity Hybrid Fund Direct Growth
A hybrid aggressive fund, it’s provided 28.76% annualised return the past year, with 17.28% annualised returns over a 3-year period. Its holding analysis reveals a 74.8% allocation to equity, and 22.8% to debt.
4. ICICI Prudential Multi Asset Fund Direct Growth
This multi-asset allocation fund has a 61.3% allocation towards equity, providing 21.10% annualised return over a 1-year period, and 17.74% over a 3-year period.
5. UTI Dynamic Bond Fund Direct Growth
The only debt-focused fund to make this list, providing 19.19% annualised return in the past year, well ahead of its peers.
Other funds that have delivered over 20% returns (3-year period) include BOI AXA Small Cap Fund, Aditya Birla Sun Life Digital India Fund, Tata Digital India Fund, Kotak Small Cap Fund, Principal Global Opportunities Fund, and Baroda Midcap Direct Fund, amongst others.
How to make your decision?
Choose a fund that reflects your risk appetite, and has delivered solid returns in the past year, or three-year period. Stay patient and invested for a year or two to tide over market volatility, in order to make the most of your investment.