- Date : 23/08/2021
- Read: 5 mins
- Read in हिंदी: 2021 में निवेश के लिए सबसे अच्छे म्युचुअल फंड़्स
Choosing a mutual fund scheme for investment can be overwhelming. To make things easy for you, we have listed the best mutual funds in various categories, and what type of investor should invest in each of them.
Investors may have different objectives for investing in mutual funds, such as maximising returns, saving tax, earning market returns, capital protection, building and maintaining an emergency fund, and investing in multiple asset classes through a single scheme. Mutual fund houses offer different mutual fund schemes, so it can often be tough to choose from among them. Let us see how various mutual fund schemes have performed in terms of returns over various periods.
1. Equity funds
An equity fund invests a major part of its assets in equity and equity-related instruments. Equity funds are further classified into large-cap, mid-cap, small-cap, ELSS, index funds, and other categories.
a) Large-cap funds
A large-cap fund invests a minimum of 80% of its total assets in equity and equity-related instruments of large-cap companies (top 100 companies by market capitalisation). Let us look at the performance of top large-cap mutual fund schemes based on three-year returns.
Note: Returns are as of 16 August 2021. The expense ratio is as of July 2021. The returns are for direct plans with growth option. One-year returns are absolute. Three year returns are annualised. The funds are ranked based on 3-year returns. The above date, returns information, and data source (www.moneycontrol.com) apply for all the tables in this article.
b) Mid-cap funds
A mid-cap fund invests a minimum of 65% of its total assets in equity and equity-related instruments of mid-cap companies (top 101 – 250 companies by market capitalisation). Let us look at the performance of top mid-cap mutual fund schemes based on three-year returns.
c) Small-cap funds
A small-cap fund invests a minimum of 65% of its total assets in equity and equity-related instruments of small-cap companies (251st company onwards by market capitalisation). Let us look at the performance of top small-cap mutual fund schemes based on three-year returns.
d) Equity linked savings scheme (ELSS)
An ELSS invests a minimum of 80% of its total assets in equity and equity-related instruments. An investment in an ELSS provides a deduction from taxable income under Section 80C of the Income Tax Act (up to Rs 1,50,000 in a financial year). An ELSS has a lock-in period of 3 years. Let us look at the performance of ELSS schemes based on three-year returns.
e) Index funds
An index fund invests a minimum of 95% of its total assets in the securities of a particular index that it is tracking/replicating. Let us look at the performance of index funds based on three-year returns.
f) Sectoral/Thematic funds
A sectoral/thematic fund invests a minimum of 80% of its total assets in equity and equity related instruments of a particular sector/theme. For example, a FMCG sectoral fund will invest majorly in shares of FMCG companies. A consumption thematic fund will invest majorly in shares of companies belonging to multiple sectors such as FMCG, telecom, Quick Service Restaurants (QSRs), jewellery, retailing, paints, etc. Let us look at the performance of sectoral/thematic funds based on three-year returns.
2. Debt funds
A debt fund invests most of its assets in fixed-income securities. The risk involved in a debt fund is relatively lower as compared to an equity fund. Depending on the types of securities that debt funds invest in, they are classified into various sub-categories:
a) Gilt funds
A gilt fund invests a minimum of 80% of its total assets in government securities (G-secs) across various maturities. Let us look at the performance of gilt funds based on three-year returns.
b) Liquid funds
A liquid fund invests most of its assets in debt and money market securities with a maturity of up to 91 days only. Let us look at the performance of liquid funds based on three-year returns.
3. Hybrid funds
A hybrid fund invests its money in more than one asset class. Depending on the number of asset classes chosen and the proportion of investment in each asset class, hybrid funds are classified into various sub-categories:
a) Aggressive hybrid funds
An aggressive hybrid fund invests its assets in a mix of equity and debt instruments. The proportion of equity and equity-related instruments is between 65% and 80% of total assets. The proportion of debt instruments is between 20% and 35% of total assets. Let us look at the performance of aggressive hybrid funds based on three-year returns.
b) Arbitrage funds
Arbitrage is a financial benefit that can be gained by taking advantage of the price difference that exists between two different markets, for the same product. For example, there can be differences in the price of equity in different markets. The fund manager of an arbitrage fund identifies such arbitrage opportunities for the benefit of investors. An arbitrage fund invests a minimum of 65% of its total assets in equity and equity-related instruments. Let us look at the performance of arbitrage funds based on three-year returns.
c) Dynamic asset allocation funds or balanced advantage funds
A dynamic asset allocation fund invests in equity and debt instruments. The proportion of equity and debt is managed dynamically. The equity and debt allocation are based on some pre-set criteria like price-to-earning (P/E) ratio or price-to-book (P/B) ratio, or any other criteria that have been defined for the scheme. These funds are also known as dynamic asset allocation funds. There is no limitation on how much exposure a fund manager can take in equity or debt. The fund manager may decide to invest 0-100% of the scheme money in equity and balance in debt. Let us look at the performance of dynamic asset allocation funds based on three-year returns.
Which fund should an investor choose?
Depending on their financial needs, an investor can choose to invest in various mutual fund schemes. Some of these include:
Asset allocation should be at the core of investment planning
An investor should follow a proper asset allocation strategy while investing in mutual funds. The appropriate asset allocation would depend on the investor’s risk appetite, age, time left to achieve financial goals, important life events (wedding, childbirth, home loan, etc.), etc. Consulting a financial advisor can be very useful as they can recommend suitable mutual fund schemes for investment.
Investors may have different objectives for investing in mutual funds, such as maximising returns, saving tax, earning market returns, capital protection, building and maintaining an emergency fund, and investing in multiple asset classes through a single scheme. Mutual fund houses offer different mutual fund schemes, so it can often be tough to choose from among them. Let us see how various mutual fund schemes have performed in terms of returns over various periods.
1. Equity funds
An equity fund invests a major part of its assets in equity and equity-related instruments. Equity funds are further classified into large-cap, mid-cap, small-cap, ELSS, index funds, and other categories.
a) Large-cap funds
A large-cap fund invests a minimum of 80% of its total assets in equity and equity-related instruments of large-cap companies (top 100 companies by market capitalisation). Let us look at the performance of top large-cap mutual fund schemes based on three-year returns.
Note: Returns are as of 16 August 2021. The expense ratio is as of July 2021. The returns are for direct plans with growth option. One-year returns are absolute. Three year returns are annualised. The funds are ranked based on 3-year returns. The above date, returns information, and data source (www.moneycontrol.com) apply for all the tables in this article.
b) Mid-cap funds
A mid-cap fund invests a minimum of 65% of its total assets in equity and equity-related instruments of mid-cap companies (top 101 – 250 companies by market capitalisation). Let us look at the performance of top mid-cap mutual fund schemes based on three-year returns.
c) Small-cap funds
A small-cap fund invests a minimum of 65% of its total assets in equity and equity-related instruments of small-cap companies (251st company onwards by market capitalisation). Let us look at the performance of top small-cap mutual fund schemes based on three-year returns.
d) Equity linked savings scheme (ELSS)
An ELSS invests a minimum of 80% of its total assets in equity and equity-related instruments. An investment in an ELSS provides a deduction from taxable income under Section 80C of the Income Tax Act (up to Rs 1,50,000 in a financial year). An ELSS has a lock-in period of 3 years. Let us look at the performance of ELSS schemes based on three-year returns.
e) Index funds
An index fund invests a minimum of 95% of its total assets in the securities of a particular index that it is tracking/replicating. Let us look at the performance of index funds based on three-year returns.
f) Sectoral/Thematic funds
A sectoral/thematic fund invests a minimum of 80% of its total assets in equity and equity related instruments of a particular sector/theme. For example, a FMCG sectoral fund will invest majorly in shares of FMCG companies. A consumption thematic fund will invest majorly in shares of companies belonging to multiple sectors such as FMCG, telecom, Quick Service Restaurants (QSRs), jewellery, retailing, paints, etc. Let us look at the performance of sectoral/thematic funds based on three-year returns.
2. Debt funds
A debt fund invests most of its assets in fixed-income securities. The risk involved in a debt fund is relatively lower as compared to an equity fund. Depending on the types of securities that debt funds invest in, they are classified into various sub-categories:
a) Gilt funds
A gilt fund invests a minimum of 80% of its total assets in government securities (G-secs) across various maturities. Let us look at the performance of gilt funds based on three-year returns.
b) Liquid funds
A liquid fund invests most of its assets in debt and money market securities with a maturity of up to 91 days only. Let us look at the performance of liquid funds based on three-year returns.
3. Hybrid funds
A hybrid fund invests its money in more than one asset class. Depending on the number of asset classes chosen and the proportion of investment in each asset class, hybrid funds are classified into various sub-categories:
a) Aggressive hybrid funds
An aggressive hybrid fund invests its assets in a mix of equity and debt instruments. The proportion of equity and equity-related instruments is between 65% and 80% of total assets. The proportion of debt instruments is between 20% and 35% of total assets. Let us look at the performance of aggressive hybrid funds based on three-year returns.
b) Arbitrage funds
Arbitrage is a financial benefit that can be gained by taking advantage of the price difference that exists between two different markets, for the same product. For example, there can be differences in the price of equity in different markets. The fund manager of an arbitrage fund identifies such arbitrage opportunities for the benefit of investors. An arbitrage fund invests a minimum of 65% of its total assets in equity and equity-related instruments. Let us look at the performance of arbitrage funds based on three-year returns.
c) Dynamic asset allocation funds or balanced advantage funds
A dynamic asset allocation fund invests in equity and debt instruments. The proportion of equity and debt is managed dynamically. The equity and debt allocation are based on some pre-set criteria like price-to-earning (P/E) ratio or price-to-book (P/B) ratio, or any other criteria that have been defined for the scheme. These funds are also known as dynamic asset allocation funds. There is no limitation on how much exposure a fund manager can take in equity or debt. The fund manager may decide to invest 0-100% of the scheme money in equity and balance in debt. Let us look at the performance of dynamic asset allocation funds based on three-year returns.
Which fund should an investor choose?
Depending on their financial needs, an investor can choose to invest in various mutual fund schemes. Some of these include:
Asset allocation should be at the core of investment planning
An investor should follow a proper asset allocation strategy while investing in mutual funds. The appropriate asset allocation would depend on the investor’s risk appetite, age, time left to achieve financial goals, important life events (wedding, childbirth, home loan, etc.), etc. Consulting a financial advisor can be very useful as they can recommend suitable mutual fund schemes for investment.
