Best Mutual Funds To Invest In India
Nearly 3 crore Indians invest in the stock market. And there are currently over 9 crore mutual fund accounts in India. Both these numbers have been steadily rising in 2020 as the coronavirus took over. Investing in mutual funds is now an important part of many people’s financial strategy, which isn’t surprising. After all, mutual funds offer the unique benefit of liquidity and diversification, combined with expert management. For an investor who does not wish to directly invest in stocks, mutual funds offer a safe and lucrative haven.
But to truly benefit from mutual funds, you’d want to know which are the best mutual funds to invest in. This not only requires an understanding of how the various types of funds operate but also whether your personal goals and requirements align with your choice of funds. Sounds complicated? It isn’t, really. Here’s a look at the factors that can help you choose the best mutual funds.
Since mutual funds are professionally managed or supervised, they naturally incur a certain cost. The term for costs in the mutual funds industry is expense ratio. It is a measure of the annual maintenance charge levied by mutual funds for their expenses. This includes management fees, maintenance fees, entry load, exit load, brokerage fees, and promotion fees. Since expense ratios are often deducted from the total income generated by the mutual fund, they have an impact on your returns.
Index funds, which are funds that track an underlying market, are a great example of funds with low expense ratios. Active mutual funds generally tend to have higher expense ratios in comparison to index funds. The reasons are that index funds are passive investments, so the fund manager is not actively buying and selling securities to outperform the market. This lowers the overall cost of index funds.
Going for funds with lower costs can help maximize returns in the long run as the money saved is compounded over time to create significant differences in returns.
Before selecting a mutual fund, investors must also ask themselves whether they are ready for long-term investments. Mutual funds are typically a long-term investment vehicle, and it’d be unwise to expect them to deliver spectacular short term returns.
In the case of debt funds, a mutual fund’s duration refers to its sensitivity to changes in interest rates. Long-duration funds are more sensitive to changes in interest rates. For example, a fund with a duration of 10 years would be twice as volatile as one with a 5-year duration.
Short-duration funds can be a good entry point for many investors who do not mind a bit of risk. They usually generate stable incomes in the short-term.
#3 How well do you understand the mutual fund
This is more of a personal factor than one specific to the mutual fund. You should genuinely be comfortable with the investments you make. In other words, invest in mutual funds that you understand well and have faith in. If there are aspects of a scheme or fund that you do not understand, it is best to either clarify it or avoid it.
Another crucial aspect to consider while choosing mutual funds to invest in is your ability to take risks. Generally, young investors at the beginning of their careers have a greater tolerance for risk. But since everyone’s financial situation and profile is unique, it is always important to understand your risk profile instead of relying on a generalization or stereotype. Take this risk tolerance survey to help yourself out.
Debt-oriented mutual funds offer lower risks as compared to equity-oriented ones, while hybrid mutual funds offer medium risk but higher returns as compared to debt mutual funds.
Portfolio diversification helps minimize risk. Therefore, well-diversified mutual funds - ones that invest across sectors and companies of varying sizes - are a good option for those looking to guard against risk. But for additional protection against risk, investors should look to diversify further across their mutual fund investments. They can do this by investing a part of one’s money in index funds and the rest in some active funds of their choice, although they should be careful not to over-diversify.
Which Mutual Fund Should You Invest In?
This post doesn’t seek to list the best mutual funds in India for you. Instead, at Glide Invest, we ask that while picking the right mutual funds, it’s important to understand that the best funds are the ones that are best for you - based on your comfort, preferences, and goals.