Smart Mutual Fund Investing With 1 Lakh

Investing in mutual funds is a popular way to invest large sums of money in India. If you are looking to invest 1 lakh in mutual funds, there are several factors to consider, including your risk appetite, investment duration, and financial goals. Here is an overview of the steps and factors to help you make an informed decision.

Large-cap mutual funds

When considering investing in large-cap mutual funds, it is important to keep in mind the investment horizon. These funds typically have a long-term investment horizon of at least five to seven years. This is because large-cap companies tend to have less volatile stocks, which means that it may take longer to see significant returns on your investment. However, the wait can be worth it, as large-cap funds can provide consistent returns over time.

Another advantage of large-cap mutual funds is the diversification they offer. By investing in a variety of large-cap companies, you can spread out your risk and ensure that your portfolio is not too heavily weighted towards any one company or industry. This can help to protect your investment in the event of a downturn in a particular market sector.

When choosing a large-cap mutual fund, it is important to consider the fund's performance over time. Look for funds that have consistently performed well over one, three, and five-year periods. Additionally, check that the fund's returns are higher than the category benchmark and that the fund manager has a strong track record in asset allocation.

While large-cap mutual funds can provide stable and consistent returns, it is important to remember that all investments carry some risk. The gains made in large-cap funds are subject to a 15% tax, as per the Income Tax Act, 1961. Therefore, it is crucial to carefully consider your financial goals and risk tolerance before investing. Consulting a financial professional can help you make an informed decision about investing in large-cap mutual funds.

Equity funds

There are different types of equity funds to choose from, depending on your risk tolerance and investment goals:

• Large-cap equity funds invest in well-established, large companies, which are often leaders in their industries. These funds offer stable returns with low or minimal risks, making them suitable for investors who want to avoid excess volatility.
• Flexi-cap equity funds provide the opportunity to invest in a mix of large, mid, and small-cap companies. These funds can offer higher returns but may also come with higher risks, so they are usually recommended for investors with a moderately aggressive risk profile.
• Sector-specific equity funds focus on a particular industry or sector, such as technology or healthcare. These funds can provide specialized exposure to an area of the market you believe in, but they also carry the risk of being more volatile than more diversified funds.

When choosing an equity fund, it's important to consider factors such as the fund's performance over time, the fund manager's experience, and the fees associated with the fund. Additionally, it's crucial to align your investment horizon and risk tolerance with the type of equity fund you select.

• Axis Bluechip Fund Growth: This fund invests in blue-chip stocks of large, financially sound, and well-established companies, offering long-term performance potential with lower volatility compared to mid-cap and small-cap stocks.
• ICICI Prudential Technology Fund Growth: This fund seeks long-term capital appreciation by investing in technology and technology-dependent companies.
• Aditya Birla Sun Life Tax Relief 96 Growth: This fund aims for long-term capital growth by investing primarily in equity (around 80% of its assets), with the remaining balance invested in debt and money market instruments.
• Quant Tax Plan Growth Option Direct Plan: This fund aims to generate capital appreciation by investing predominantly in equity shares with growth potential, while also offering dividends and other income as a secondary objective.
• SBI Technology Opportunities Fund Direct-Growth: This fund provides investors with the opportunity for long-term capital appreciation by investing in a diversified portfolio of technology and technology-related companies.

Debt funds

When investing in debt funds, it is important to consider the fund's performance over time, the fund manager's experience, and the consistency of its returns. Additionally, investors should assess the fund's performance against its benchmark and category to ensure it is meeting its investment goals. Diversifying your portfolio by investing in multiple debt funds can also help reduce risk.

• Debentures: These are unsecured debt instruments issued by companies to raise medium and long-term funds. They are not backed by any collateral but offer a fixed rate of interest to lenders.
• Bonds: Issued by governments, central banks, or large companies, bonds ensure the payment of a fixed interest rate to lenders. The principal amount is repaid at the end of the term.
• Mortgages: This involves taking out a loan against a residential property. If the borrower defaults, the property can be sold to recover the loan amount.
• Treasury Bills: These are short-term debt instruments that mature within a year and can only be redeemed at maturity.

Hybrid funds

There are several types of hybrid funds, including:

• Multi-Asset Allocation Funds: These funds require investment in at least three asset classes, with a minimum of 10% in each. They give investors exposure to multiple asset classes, and the allocation is decided based on the fund manager's view.
• Aggressive Hybrid Funds: These funds invest a minimum of 65% and a maximum of 80% in equity and 20 to 35% in debt. They provide the possibility of high returns with reduced risk through a small allocation to debt.
• Dynamic Asset Allocation or Balanced Advantage Funds: These funds can shift between 100% debt to 100% equity. The allocation is decided based on the recommendation of a financial model deployed by the fund. They are suitable for investors who want to automate their asset allocation.
• Conservative Hybrid Funds: These funds invest 10 to 25% in equity and the remainder in debt. They aim to generate income from the debt component and use the small equity component to boost overall returns.
• Equity Savings Fund: These funds invest in equity, derivatives, and debt to balance risk and returns. Derivatives reduce directional equity exposure, providing stable returns, while equity provides growth.
• Arbitrage Funds: These funds use an arbitrage strategy, buying in the cash market and selling simultaneously in the futures market to generate returns from the price differential. They are considered low-risk as there is no directional call.

When investing in hybrid funds, it is important to consider the investment risk, expected returns, investment horizon, and costs. While hybrid funds offer diversification and active risk management, they do not offer guaranteed returns, and the returns are affected by the performance of the underlying investments. The higher the equity component, the riskier the fund.

Flexi-cap mutual funds

Flexi-cap funds are a type of mutual fund that is not restricted to investing in companies with a predetermined market capitalization. This means they can invest in large, mid-size, or small-cap companies without any constraints on the size of the company. A flexi-cap fund can provide the fund manager with greater investment choices and diversification possibilities.

Flexi-cap funds are required to invest a minimum of 65% of their total assets in equity and equity-related instruments, according to the Securities and Exchange Board of India (SEBI). This makes them an equity-oriented fund.

• Flexibility: Flexi-cap funds are popular among investors because their asset allocation is flexible. They are not confined to the norms that restrict categories such as large-cap, mid-cap, or even multi-cap funds. Fund managers can choose to invest in all sections of equity, allocate to debt, or even sit on cash. This means that within a single fund, you can gain exposure to large-cap, mid-cap, and small-cap companies, and even some debt funds. Some flexi-cap funds also offer international exposure.
• New category: Flexi-cap funds are a relatively new category of mutual funds, launched in November 2020. They are seen as a refined version of multi-cap funds, without the limitation of having to allocate a fixed percentage to each of the three market cap categories.
• Good returns: Flexi-cap funds have delivered strong returns as a category. For example, in the past year, they returned 30.26%, compared to the Nifty50's 20% rise.
• Tweaking allocation: Fund managers can tweak the allocation of the fund's portfolio. They can increase the allocation to small and mid-cap companies during a bull market and reverse the ratio in favour of large-cap companies when the market becomes volatile. This freedom is not available in any hybrid fund.

When deciding whether to invest in flexi-cap funds, it is important to consider your financial goals and risk tolerance. Flexi-cap funds may be suitable for investors looking for a large-cap-focused fund with some exposure to mid-cap and small-cap stocks, and who are investing with a 5-year time horizon.

It is also important to remember that investing in mutual funds carries risks and it is essential to do your research before investing a large amount of money.

Frequently asked questions