Mutual funds are investment funds that pool money from different investors and then invest it in different market securities like equity, bond, stocks, etc. in order to yield the highest return. Before you start investing in mutual funds, you must acquaint yourself with the different types of mutual funds. To compare mutual funds and choose the best option, first take a look into the available options.
In mutual funds comparison, the fundamental rule as we all know is more time= more returns + more risk, and vice versa. In order to compare mutual funds online, it is important to have a proper knowledge of the market. Mutual funds are categorised based on time, asset class, structure or objective. To compare mutual funds, one should take into consideration all of these factors and not just the return rate. Below is a short description of all types of mutual funds available in India.
Based on the asset class, there are many types of mutual funds available in India. For example, there are:
- Debt Funds: debt fund is an investment pool, in which investment is made in short-term or long-term bonds, money market funds, securitised products, or floating debt rate. The debt funds also offers lower fee ratios as comapred to the equity funds because the overall cost of management are lower.
- Equity Funds: Equity funds, also known as stock funds, are the type of mutual funds that invest in stocks or equity securities. It is riskier than fixed income funds but offers more lucrative returns as well. Equity funds can be actively or passively managed. Equity funds are one of the most popular investment options for most people with a moderate amount of capital and limited knowledge in the field of investment. This is because of two primary reasons- 1. diversification, 2. low amount of investment capital.
- Money Market Funds: As the name suggests, this type of mutual funds invest in money market instruments such as cash, treasury bills, commercial papers etc. they are considered a safe investment because, though the rate of interest keeps changing over time, the market is not as volatile as stocks.
- Balanced Funds: These types of mutual funds invest in a mix of both debt and equity funds. As a result, both the risks and the returns are balanced Balanced funds typically hold more stocks than debt-related instruments such as cash or treasury bills.
- Fund of Funds: These types of funds invest in other mutual funds rather than investing directly in securities or stocks. These funds contain different underlying assets, and the investors get benefits of belonging to a group.
Based on the Structure, Mutual Funds is Classified in Two Types:
- Open-ended Funds: These types of funds have an unlimited number of shares, and the shares can be purchased throughout the year. They are more liquid.
- Close-ended Funds: These type of funds have a limited number of stocks, and they are offered through IPO (Initial Public Offering).
However, perhaps the most important classification of mutual funds is regarding the kind of growth it offers. Mutual funds can be classified into four categories based on the kind of growth they offer.
- Aggressive Growth Mutual Funds: An aggressive growth fund is a type of fund that seeks the highest possible return by investing in aggressive growth stocks. They offer capital returns, but the risk factor is also the highest. These funds invest in shares that have the highest potential of growth, but the share prices are much volatile. To know whether your mutual fund falls under this category or not, you have to look into the fund’s objective. Since they fall under the high-risk category, potential investors need to be extra careful before proceeding with the investment. To compare mutual funds regarding risks, there are three metrics used by experts. They are: Beta, Standard Deviation and Sharpe Ratio. By comparing different types of mutual funds under these metrics, investors can get an idea of what they are getting themselves into.
- Growth Mutual Funds: If you are investing in equity mutual funds, you have two options to choose from: one is a dividend, and another is growth. In case of growth funds, the investment is made in stocks of companies that have good potential and can outperform themselves regarding These types of investment options are good for young investors who can take risks. On the other hands, older investors whose retirement age is near are advised against it. Growth mutual funds bear high-risk potentials. Dividend funds are different from growth mutual funds. They are considered safer, and they invest in companies that pay dividends. Dividends are profit money that a company shares with its stockholders.
- Growth and Income Mutual Funds: Growth and Income Funds are simply those funds that have the strategy of both capital appreciation and dividends. These funds are considered to be a balanced investment, one that offers moderate returns paired with moderate risks. Growth and income funds serve the dual purpose by investing in a balanced way. They combine growth and income by investing in stocks that have the potential to grow at a good rate, at the same time they seek to provide the investor with an income through dividends and interests.
- International Mutual Funds: As suggested by the name, international mutual funds invest in foreign funds. Investing in overseas funds can bring higher returns, which in turn raises the risk factors too. International Mutual funds are a good long-term investment option for you if your risk bearing ability is on the higher side. The primary reason that investors are interested in International Mutual Funds is that the economies of different countries are different. So if your investment is diversified between different countries, it reduces the chances of loss and increases the chances for better returns.
Comparing the Top Mutual Funds in India:
Let’s take a look at the top mutual funds available in India for the current financial year.
- ICICI Prudential Equity & Debt Fund
- Motilal Oswal Multicap 35 Fund
- L&T Tax Advantage Fund
- ICICI Prudential Bluechip Fund
- SBI Magnum MultiCap Fund
- Aditya Birla Sun Life Tax Relief 96
- L&T India Value Fund
- SBI Bluechip Fund
- DSP Equity Opportunities Fund
- Mirae Asset Emerging Bluechip Fund
Apart from the top 10 mutual funds, there are umpteen numbers of options available for you to invest. So while choosing a plan for yourself, what are the things that you should pay attention to? Here’s a quick guide to help you.
- Set your Goal: Before you invest in a mutual fund, you should have a clear goal set for yourself. First, decide what are you expecting out of these investments? Are you looking for a long-term investment so you can enjoy capital gains after the maturity of your investments? Or are you looking for a short-time investment to quickly gain some extra money? You can also go for income funds that offer dividends and interests as some added income periodically. Your financial goal will be a major factor in deciding the best mutual fund for you.
- Identify your Risk Tolerance: If you are young and have just started with your career, your risk bearing abilities will be higher. On the other hand, if you are closer to your retirement age, or already retired, your risk bearing abilities will generally be lower. Of course, both of the rules have exceptions. Ultimately your risk bearing abilities depend on your approach and financial stability. Depending on how much risk are you willing to take, you choose the right mutual fund for yourself.
- Look into the Fund’s Past Performance: This is not a full-proof plan to secure yourself with the best mutual fund options. Still, experts consider the past performances of a mutual fund to be an important factor. Although past performances fail to determine the future results for a fund more often than not, it is not decided solely by the returns it earned, but it depends on the overall performance of the mutual funds, such as volatility, or unusually high returns (resulting in unexpected tax liabilities for the investors).
- Experience of the Portfolio Manager: Knowing about the fund manager’s performance and experience is also an important factor in choosing a mutual fund. If the fund manager was unable to deliver what he promised for consecutive years, you might consider not investing in that fund.
- Know About theC: Mutual funds charge many types of fees. There’s front-end load, which is charged during investment, and there’s back-end load, which is charged if you sell your investments before maturity. There’s also level-load funds that charge an annual fee, and no-load funds also exist who do not charge front-end or back-end charges, but they can charge expense ratio and administration fees.