What are Mutual Funds?
A mutual fund is an investment scheme managed by professional Fund Managers. It collects money from a number of investors to invest in a portfolio of stocks, bonds, or other securities.
Who Should Invest in Mutual Funds?
- Willing to take more risk for higher return
- Invested enough in debt instruments such as FDs, PPF, SSY etc
- Want to invest in stock market but have less knowledge and time
Who should not invest in Mutual Funds?
- If you do not understand the risk of investing in Stocks and Mutual Funds
- If no patience to invest for long term
- If not emotionally capable to see your investment 20-40% down
How to start investing in Mutual Funds?
You can easily start investing in Mutual Funds in few hours by applying via:
- Discount brokers (such as Groww, Zerodha, Angel One, Upstox etc)
- Full-Service Brokers in India (ICICIdirect, HDFC Securities, Kotak Securities etc)
Benefits of Mutual Funds over Stocks:
Investing in Stocks and Mutual funds have some advantages and disadvantages over each others. Here, we will talk about benefits of Mutual Funds:
| Mutual Funds | Stocks |
| Offers Tax saving options (ELSS) | No scheme for Tax exemption |
| Moderate Risk | High Risk |
| Less Knowledge required | More Knowledge required |
| Less Time required | More Time required |
| More Diversification with Less amount | More amount required for Diversification |
| Less Patience required | More Patience required |
In the next chapter, we will talk about benefits of Stocks investment over Mutual Funds.
How to choose Best Mutual Funds Step by Step?
We can divide Mutual Fund selection process into two steps:
Step 1: Select Top 5-10 Mutual Funds based on:
- Goals (Category) and
- Rating or Ranking or Return
Step 2: Compare and Select Best based on:
- Ratings of the Fund
- Expense Ratio
- Diversification / Holdings
- AUM
- Exit Load / Taxation
- Others (Fund house, your beliefs etc)
Types of Mutual Funds
It is important to invest with some goals in your mind. Then, based on the goals duration and your risk taking ability, you need to choose Mutual Fund category.
There are different types of Mutual Funds based on Asset Class, Structure & Objectives. As per SEBI, Mutual Funds classified into:
- Equity Funds – invests in the stocks of different companies such as
- Large Cap, Mid Cap, Small Cap, ELSS, Sectoral, Focused Funds etc
- Debt Funds – invests in fixed income instruments such as debt securities, corporate and government bonds
- Hybrid Funds – invests in a combination of debt and equity
- Solution Oriented Funds – for retirement and child’s education goals
- Other Funds – invests in Index Funds, ETFs, FoFs, Global Funds
Equity Fund Categories allocation as per SEBI guidelines
| Multi Cap Fund* | At least 75% investment in equity & equity related instruments |
| Flexi Cap Fund | At least 65% investments in equity & equity related instruments |
| Large Cap Fund | At least 80% investment in large cap stocks |
| Large & Mid Cap Fund | At least 35% investment in large cap stocks and 35% in mid cap stocks |
| Mid Cap Fund | At least 65% investment in mid cap stocks |
| Small cap Fund | At least 65% investment in small cap stocks |
For latest data, refer to https://www.amfiindia.com/investor-corner/knowledge-center/SEBI-categorization-of-mutual-fund-schemes.html
As a step one, you have to select few Mutual Funds based on goals and rating/ranking. Once they are shortlisted, you can compare them based on step 2) parameters in a table.
Here is an example only for reference.
| Mutual Funds | Rating | Returns | Expense Ratio | Sector Allocation | Holdings | AUM(Cr) | Other Factors (Fund/Belief) |
| Quant Tax Plan | 5 | 0.76% | Very Good | Very Good | 4924 | Good | |
| Bandhan Tax Advantage | 5 | 0.63% | Good | Good | 5160 | Average | |
| DSP Tax Saver | 4 | 0.80% | Poor | Poor | 12085 | Good | |
| SBI Long Term Equity Fund | 4 | 0.99% | Good | Poor | 16245 | Very Good | |
| HDFC Taxsaver Direct | 3 | 1.15% | Poor | Very Good | 11501 | Very Good | |
| Franklin India Taxshield | 3 | 1.00% | Poor | Good | 5356 | Average | |
| Kotak Tax Saver | 5 | 0.54% | Good | Good | 4198 | Good |
Now, you can select 1 or 2 funds which meets the maximum or most important parameters.
11 Important Tips for Mutual Fund Investment:
- Build Long Term investment mindset
- Set right expectation
- Research before investment, not after investment
- Start with small investment if you are beginner
- Avoid lumpsum investment when market is all time high or overvalued
- Avoid time to market
- Use SIP to discipline
- Avoid too many recommendations
- Diversification, not over diversification
- Do not blindly follow top performers
- Avoid checking daily performance
** Important Links and Tools: **
- Trendlyne Mutual Funds Screener
- Mutual Funds types as per SEBI / AMFI
- Value Research screener
- Groww Mutual Funds Screener
- Money Control Mutual Funds Screener
- EPF details
- Smallcap Mutual Funds Return example in TickerTape
Best YouTube Videos on Similar Topics:
- How to find Best Mutual Funds to Invest by CA Rachana Phadke Ranade
- Mutual Fund for Beginners by pranjal kamra
- Mutual Funds Basics For Beginners by Asset Yogi
Financial Planning and Investment Series (FPIS) in Hindi:
Disclaimer:
We are not Sebi Registered. Investing and trading in stock market, future and options, mutual funds, cryptocurrency, involve substantial risk of loss. Any such discussion or information provided here is for educational purposes only and before making any investment decisions, please consult with a financial advisor.
