Mutual Funds In India: Best Investment Options

Mutual funds are a smart way to grow your money in India. They are an investment vehicle where multiple investors pool their funds, which are then managed by a professional fund manager who invests the money across various asset classes. This can include equity, debt, gold, and other securities. Mutual funds offer advantages such as professional management, liquidity, and the potential for higher-than-inflation returns. They are also regulated by the SEBI, ensuring transparent processes and protection for investors. With a wide range of mutual funds available, from equity funds to debt funds and hybrid funds, it is important to choose a fund that aligns with your risk tolerance and investment goals.

Equity funds

Types of Equity Funds

By Market Capitalisation

• Large-cap equity funds: Invest a large portion of their corpus in companies with large market capitalisation. These funds are known to offer stability and sustainable returns over time. Large-cap stocks tend to be less volatile and are therefore considered less risky.
• Mid-cap equity funds: Invest in stocks of mid-size companies, which are still considered developing. Mid-cap stocks tend to be riskier than large-cap stocks but can offer more growth potential.
• Small-cap funds: Invest in stocks of smaller-sized companies, which typically have a market capitalisation of less than ₹100 crores. Small-cap stocks have significant growth potential but also carry a greater risk of failure.
• Multi-cap equity funds or diversified equity funds: Invest in stocks across the market regardless of size and sector. These funds provide the benefit of diversification and are meant for investors who seek exposure to the entire market.

Other Types of Equity Funds

• Thematic equity funds: Invest in securities of specific sectors such as information technology, banking, or pharmaceuticals. The performance of these funds depends on the performance of the respective sector.
• Equity-linked savings scheme (ELSS): An equity mutual fund that invests at least 80% of its assets in equity and equity-related instruments. ELSS funds can be open-ended or close-ended and offer tax deductions under Section 80C of the Income Tax Act.

Benefits of Equity Funds

• Diversification: Equity funds provide a diversified portfolio, typically holding 40-50 stocks, which reduces the risk for investors.
• Professional management: A team of professionals carefully selects stocks and manages the fund, aiming to deliver maximum returns while controlling risk.
• Long-term wealth creation: While equity funds can be volatile in the short term, they have the potential to generate high returns over the long term, making them suitable for investors with long-term goals such as retirement or children's education.
• Tax benefits: ELSS funds, for example, offer tax-saving benefits, allowing investors to reduce their taxable income.
• Low minimum investment: Investors can start investing in equity funds with a small amount, typically as low as ₹100, making them accessible to those who want to invest in the stock market but can only invest small amounts.

Debt funds

When deciding which debt fund to invest in, first determine your investment horizon. This will help you select the right debt fund category. The next step is to pick a fund from the category that lends to good companies and has a lending duration similar to your investment duration.

• HDFC NIFTY G-Sec Jun 2036 Index Fund
• SBI CRISIL IBX Gilt Index - June 2036 Fund
• Edelweiss CRISIL IBX 50:50 Gilt Plus SDL April 2037 Index Fund
• Bandhan Government Securities Fund Constant Maturity Plan
• Kotak Medium Term Fund
• SBI Magnum Constant Maturity Fund
• HDFC Nifty G-Sec Sep 2032 Index
• Invesco India Nifty G-sec Sep 2032 Index Fund
• HDFC Regular Savings Fund
• ICICI Prudential Dynamic Bond Fund
• Sundaram Low Duration Fund
• SBI Magnum Gilt Fund
• UTI Short Duration Fund
• ICICI Prudential All Seasons Bond Fund
• UTI Low Duration Fund
• UTI Ultra Short Duration Fund
• ICICI Prudential Gilt Fund
• Nippon India Ultra Short Duration Fund
• ICICI Pru Liquid Fund (Growth)
• HDFC Overnight Fund(G)
• HDFC Floating Rate Debt Fund(G)
• Aditya Birla SL Savings Fund-Reg(G)

Hybrid funds

There are several types of hybrid funds, including:

• Aggressive Hybrid Funds: These funds invest in stocks with some allocation to FD-like instruments, while most of the investment is spread across pure equity funds.
• Conservative Hybrid Funds: These funds primarily invest in FD-like investment vehicles. They provide more returns with minimal risks than equities.
• Multi-Asset Allocation: These hybrid funds invest at least 10% of their total assets across at least three asset classes, such as equity, debt, and gold.
• Dynamic Asset Allocation Funds: Also known as Balanced Advantage Funds, these funds can allocate up to 0-100% in equities or debt based on predefined asset allocation models they follow.

Some of the top-performing hybrid funds in India include:

• JM Aggressive Hybrid Fund
• ICICI Prudential Equity & Debt Fund
• Edelweiss Aggressive Hybrid Fund
• HDFC Balanced Advantage Fund
• ICICI Prudential Multi-Asset Fund
• ICICI Prudential Retirement Fund - Hybrid Aggressive Plan

When considering investing in hybrid funds, it is important to keep in mind that these funds do not come with guaranteed returns. The return can be affected by the performance of the underlying assets, and there are also market risks and interest rate risks associated with these funds.

ELSS funds

ELSS (Equity-Linked Savings Scheme) funds are a type of equity fund that offers the dual benefit of tax savings and wealth generation. ELSS funds have a minimum asset allocation of 65% in equity and equity-linked securities, with some exposure to fixed-income securities. They are suitable for investors who want to save on taxes and are willing to take on the risks associated with equity investments.

One of the key advantages of ELSS funds is their short lock-in period of three years, which is the shortest among all tax-saving investment options. This makes ELSS funds more liquid than other options such as Public Provident Funds (PPF), which have a minimum maturity period of 15 years. ELSS funds also have the potential to generate higher returns compared to traditional investment options like bank fixed deposits and PPF, as they invest in stocks of different companies, and their Net Asset Value (NAV) fluctuates accordingly.

When investing in ELSS funds, individuals can choose between two routes: Systematic Investment Plan (SIP) and lump-sum. SIP allows investors to pay fixed instalments at regular intervals (monthly, quarterly, annually, etc.), while the lump-sum method involves investing a lump sum amount in the ELSS fund scheme.

Some popular ELSS funds in India include:

• Bandhan Tax Advantage (ELSS) Fund
• SBI Long Term Equity Fund
• Quant ELSS Tax Saver Fund
• Parag Parikh Tax Saver Fund
• Bank of India ELSS Tax Saver Fund
• Motilal Oswal ELSS Tax Saver Fund
• HDFC ELSS Tax Saver Fund
• JM ELSS Tax Saver Fund
• DSP ELSS Tax Saver Fund

It is important to note that ELSS funds carry certain risks, including liquidity risk and market risk. Investors should carefully consider these risks and assess their investment horizon and risk tolerance before investing in ELSS funds.

Tax-saving funds

Tax-saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), are a type of equity mutual fund that offers tax-saving benefits under Section 80C of the Income Tax Act. Investments made into these funds can provide tax deduction benefits of up to Rs. 1.5 lakh in a financial year.

ELSS funds have a lock-in period of 3 years, which is the shortest among all tax-saving investments. After this period, ELSS funds can be redeemed as a lump sum or via a Systematic Withdrawal Plan (SWP). These funds invest primarily in the stocks of various companies, irrespective of their operational sector or market cap, and are known to provide superior returns over the long term.

• Quant Tax Plan (22.50%)
• BOI AXA Tax Advantage (18.26%)
• Mirae Asset Tax Saver Fund (18.22%)
• Canara Robeco Equity Tax Saver (17.26%)
• IDFC Tax Advantage (ELSS) (16.24%)

When considering tax-saving mutual funds, it is important to assess your risk tolerance and investment horizon. ELSS funds are suitable for aggressive investors with a high-risk appetite, the ability to endure market volatility, and a long-term investment horizon of at least 5 years. Additionally, it is recommended to invest in these schemes through a Systematic Investment Plan (SIP) to benefit from rupee cost averaging and compound interest.

Frequently asked questions