Which mutual funds to select if you can invest Rs 40,000 a month?- Click here to know.

Top diversified mutual funds for your SIPs of Rs 40,000 a month.

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Your investment planning is important to create long-term wealth. If you start early, there is a high chance of success. Starting early will help you to benefit from the compounding in the stock market. In India, mutual funds have given good returns in the long term. You can expect to gain between 10 to 14% CAGR in the long term.

The choice of mutual funds should be based on your return expectations and your age. If you are young, you should invest more of your money in Flexi cap schemes to benefit from the fund managers' decisions. If the fund manager is good, he/she can regularly outperform the markets and give you consistent long-term returns. But if you are nearing retirement, you should make more use of large-cap schemes. Also, a small part of your portfolio should be invested in smallcap and midcap funds to benefit from the high potential in the small and midsize companies.

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An ideal portfolio should be well diversified to face market uncertainties. If you are young, you can take some risks. In any case, you should invest only in diversified mutual funds. The advantage of investing in diversified mutual funds is that you have lesser risk due to concentration risk. If you select a sectoral fund, you need to time the markets, which is very difficult. If you select a diversified mutual fund, the fund will diversify your money into various stocks. The ideal mix is given as below: -

  1. Largecap Equity mutual funds- The largecap equity mutual fund will invest your money into the top 100 stocks by market capitalization. Since the investment of this mutual fund will be in largecap stocks only, this mutual fund will have lesser risk. You can select the Axis Nifty 100 Index Fund from this category.
  2. Flexi Cap mutual funds- These mutual funds have the mandate to invest in the desired market capitalization as per the assessment of the fund manager. This means that these mutual funds can invest in small caps, midcaps and largecaps as well. These mutual funds can benefit by selecting the right stocks depending on the fund manager’s view. Thus, the fund manager can decide which stocks to invest in as per his/her expert analysis. Also, the Flexi cap mutual funds diversify your money into different market capitalization stocks. We have selected two mutual funds from this category, the Parag Parikh Flexi Cap Fund and the Canara Robeco Flexi Cap Fund.
  3. Smallcap or Midcap mutual funds- These mutual funds invest your money in small and midsize companies to benefit from their growth potential. As these firms are risky, you should invest only a small amount of the portfolio in these funds. In this category, we have selected SBI Small Cap mutual fund.

The correct ideal mix for a portfolio of Rs 40,000 is given below, along with the returns of these mutual funds:-

Returns over one year are annualized

*Returns over one year are annualized

The above portfolio will diversify the risk as all mutual funds are diversified, and the flexi cap funds have a weightage of 50%. The weightage of 50% ensures that your money is diversified across the different size of the companies. The largecap fund with 37.5% weightage ensures stability to the portfolio, and the smallcap fund with 12.5% weightage allows the fund to benefit from the growth of small and midsize companies.

Related: Focused Funds Vs Diversified Mutual Funds: Which one to choose?

The above portfolio can serve as a starting point to help you select your own mutual funds in an ideal portfolio. If you diversify your risk well, you can get consistent long-term returns and benefit from the India growth story. The correct portfolio should be diversified well to reduce concentration risk.

Related: Dummies Guide to Mutual Funds

How to select Best Mutual Funds | Investing in Mutual Funds

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.

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