Introduction
- Overview of Mutual Funds in 2023
The Indian mutual fund industry as of today comprises of roughly 45 Asset Management Companies (AMC) the cumulatively offer more than 1500 schemes across Equities, Fixed Income and Precious Metals. It has grown by leaps and bounds, with Assets Under Management (AUM) growing 5x over the last decade to reach INR 49 Lakh Crores as of 30th November 2023.
Mutual funds are investment vehicles that allow you to pool your money with other investors and invest in various stocks, bonds, and other securities. Mutual funds are professionally managed, can be purchased through a broker or advisor, and come with low fees.
Mutual funds are one of the most popular investment vehicles because they offer the opportunity to diversify across different asset classes without managing individual investments. In addition, mutual funds may provide access to investments that would otherwise not be available to a particular investor.
- Importance of choosing the right fund
With over 1500 mutual fund schemes to choose from over 44 AMCs, choosing the right fund is extremely important. While there are many ‘good’ schemes which are launched by AMCs, it is important for investors to find the ‘right’ scheme that is suitable for them keeping in mind their individual return expectation, risk tolerance and investment horizon.
Understanding Mutual Funds
- Definition and Basics
A mutual fund is a collective investment vehicle that collects & pools money from a number of investors and invests the same in equities, bonds, government securities, money market instruments. The money collected in mutual fund scheme is invested by professional fund managers in stocks and bonds etc. The mutual fund issues “Units” against the amount invested at the prevailing NAV (Net Asset Value = Total AUM / total number of units issued).
- Mutual funds are ideal for investors who:
1. Lack the knowledge / skill / experience of investing in stock markets directly
2. Want to grow their wealth but do not have the time or the inclination to do individual stock research
3. Want to invest small amounts regularly
- Types of mutual funds:
Mutual funds come in various categories and types. Lets break it down for you:
1. Based on organization structure: Open ended, Close Ended, Interval Funds
2. Based on Investment Objective: Growth, Income, Liquidity
3. Based on Management style: Active or Passive
4. Based on asset class: Equity, Debt, Hybrid, Money Market, Multi Asset, Precious Metals
5. Theme / Solution Oriented: Tax Saving, Retirement Benefit, Arbitrage
6. Based on Segmentation: Large Cap, Multi Cap, Flexi Cap, Mid Cap, Small Cap
7. Exchange Traded Funds – These can be bought directly on the stock exchanges
8. Overseas Funds – Funds that invest in international markets
9. Fund of Funds – Funds that invest in schemes of other funds
Criteria for Evaluating Mutual Funds
It is important that investors understand the basics of how to select the best performing mutual funds in the market.
- Performance metrics:
Performance metrics such as historical performance of the fund across multiple timeframes such as 1 Year, 3 Years, 5 Years, 10 Years and returns since Inception of the fund are important to track.
It is also important to compare these returns versus the category average of the scheme under consideration as well as its performance against its designated benchmark to understand if the fund has been underperforming or outperforming its peers and the benchmark.
It is imperative to understand what the drivers of the out/under performance are and assess if those drivers are sustainable or not.
- Expense Ratio and Costs:
The expense ratio, denoting the yearly fees being charged by the fund management team, is usually charged as a percentage of the AUM and plays a pivotal role in influencing the fund’s overall returns.
Generally lower expense ratios lead to higher net returns for investors. Expense ratios encompass operational costs of managing the fund which includes fund management charges, marketing expenses and distribution costs.
The impact of expense ratios on the underlying net returns of a scheme becomes more prominent over extended holding periods for long term investors.
- Other Factors:
Size of the fund – The performance and liquidity of a Mutual Fund scheme can be impacted by its size. Generally larger funds provide increased diversification and stability to investors.
Tax Implications – It is important to understand the structure of the Fund as taxation rules can have a significant impact on post tax returns for an investor. As of today, Funds with atleast 65% allocation to Indian Equities get classified as ‘Equity’ mutual funds and enjoy benefits of long term and short term capital gains taxation structure. Gains from all other funds are taxed at the individual’s income tax slab.
Which are some of the best performing Mutual Funds of 2023?
Some of the best performing mutual fund schemes (ranked on 1/3/5 year performance) in the Equities space are as follows:
Note: These are funds selected based on data up to 19th December 2023.
What are the Investment Strategies for investing in mutual funds in 2024?
Given the challenging Macro backdrop globally due to slowdown in major economies such as US, UK and China, India being the fastest growing economy, will continue to remain a favorite destination for investors. While certain pockets such as Small Cap Funds and Mid Cap Funds are currently overheated, there is enough opportunities in other spaces such as Large Cap funds and Index Funds.
Further investors can also pursue diversification by parking money in debt mutual funds and take advantage of the falling interest rate cycle, particularly through Gilt Funds or Dynamic Bond Funds where both high accrual interest income as well ample scope for capital appreciation due to increases in prices of bonds exist.
Lastly, given the global back drop of geopolitical uncertainties, it is always advisable for investors to also have some allocation (5-10%) into Gold and Silver via Gold Funds and Silver ETFs.
Investors who do not have the inclination to construct their own portfolios can always opt for ready made diversification through multi asset funds, dynamic asset allocation funds or hybrid funds managed by various mutual fund houses.
How to invest in Mutual Funds?
Investors can invest in the best performing mutual funds through the Stack Wealth app which can be downloaded from Google Playstore and Apple Appstore freely.
All you need to do is register and complete your KYC on the app 100% digitally simply by using your PAN number, Mobile number and Date of birth. Once you have set up your bank mandate, you can select from any of the multiple mutual fund stacks listed under “Flagship” and “Opportunities” and begin your long term journey towards wealth creation.
Risk and Considerations of investing in Mutual Funds
Mutual funds carry certain risk factors which investors must keep in mind. These include:
- Market Risk: There are a lot of factors that affect the market. A few examples are a natural disaster, inflation, recession, political unrest, fluctuation of interest rates, and so on. Market risk is also known as systematic risk. Investors can counter this risk by adequately diversifying their portfolio by investing in different asset classes
- Interest Rate Risk: Investing in debt funds particularly face this risk. During periods of rising interest rates debt funds, especially long term debt funds tend to underperform and is the opposite during periods of falling interest rates.
- Concentration Risk: It is advisable for investors to not concentrate their investments in just a few mutual fund schemes. Also being heavily exposed to just one market segment or asset class or sector can also cause portfolio to under perform significantly during periods of market stress. Hence it is advisable for investors to diversify their portfolio. Generally investing in 7-8 mutual funds across multiple categories is a good strategy to adopt.
- Rebalancing: It is important for investors to actively track the performance of their mutual funds and to rebalance at regular intervals (once every year or couple of years). Most mutual funds tend to behave in a cyclical fashion and funds which are in the top quartile in terms of performance in one year can figure in the bottom most quartile the next year as market trends shift.
Conclusion
Given the diverse choices of schemes across multiple AMCs, it is important for investors to adopt a structured approach towards selecting the funds that meet their individual requirements after carefully screening the funds for various factors such as performance, risk management, and expense ratios. It is generally preferred that investors adopt adequate diversification by investing in atleast 7-8 mutual fund schemes across various categories and pursue active management of the portfolio by doing a periodical assessment of the portfolio and weed out under performing funds while replacing the same with funds that have a better scope to perform in the future.
FAQs:
- What is an equity fund?
An equity fund is a mutual fund that invests principally in stocks / equity shares of a Company. It can be actively or passively (index fund) managed. Equity mutual funds are principally categorized according to Market Capitalization size, the investment style and Geography.
- Is it a good time to invest in mutual funds?
There is no "best time to invest in mutual funds”. You can invest whenever you like and in whatever way you like. For instance, you can invest in a lump sum if you have a readily deployable corpus. However, if you want to invest a small amount on a monthly basis, you can choose the SIP (Systematic Investment Plans) option.
- Which mutual fund is best for the short term?
Debt mutual funds and Arbitrage funds are suitable for short term investment goals for users (upto a period of 1 year).
- How to choose the best mutual fund?
There are 3 main factors to look at while choosing a fund, viz., performance track record, risk management and expense ratio of the mutual fund. Other factors are important while selecting a mutual fund which include understanding your investment goal, time horizon and risk tolerance.
