How to choose a right mutual fund scheme for investing
Mutual Funds - may not be the first thing that comes to our mind, when we think about savings. There have been many doubts in the mind of the investors about investing in MFs than knowing the benefits of investing. This article focuses on educating investors about the benefits of investing in Mutual fund and help in selecting a right scheme.
Where the investors were already burdened with the doubts of investing in mutual funds, now also have to choose the fund house and the right fund that suits their requirement. This edition focuses to serve as a platform for investors to know and educate themselves about the benefits of mutual funds and selecting the right mutual fund that suits the requirement the best.
Out of the total 1000 open ended funds around 229 funds have been in offering for more than a decade now. Following table depicts the performance for these funds over the last decade:
If you were lucky enough your investment would have yielded more than 20 percent, but to be able to find the right fund amid hundreds on offer can be confounding, and if you make the wrong choice you could lose money in a big way.
Selection of mutual fund should be based on the investment plan, the category of fund (debt, equity, or hybrid). Within a category the right scheme can be selected based on criteria such as past performance of the scheme, comparison with peer set and benchmark, volatility measures and risk adjusted performance of the scheme, scheme size, expense ratio of the scheme, fund manager performance etc. These data and information are easily available on net and should be carefully collated before making any investment decision.
There are various types of mutual funds on offer in market .The understanding of each of those are important to make a prudent decision.
The aim of these funds is to provide capital appreciation over a long term period by investing maximum part of the corpus into equities.
Diversified Equity Fund: These funds aim to diversify the investments across companies and across sectors.
Small and Mid-Cap Funds: These funds are aggressive in their investment nature with an aim to generate long term appreciation from a portfolio that is substantially constituted of equity and equity related securities, which are not part of top 100 stocks.
Sector Specific Funds: These invest into sectors which are mentioned in their objective or offer documents, such as banking, FMCG, etc.
Thematic Funds: These funds invest into equities of companies belonging to a particular theme such as Infrastructure, Energy etc
Tax Saving Funds (ELSS): It offers tax rebates to investor u/s 80C of I. T. Act. Any contributions made in ELSS are eligible for 100% rebate.
The objectives of these funds are to invest in debt papers. Government authorities, private companies, banks & financial institutions are some of the major issuer of debt papers
Gilt Funds: Invest their corpus in securities issued by government. These funds carry zero default risk but are associated with Interest Rate Risk.
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and government securities.
Monthly Income Plan (MIPs): MIPS invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market.
Short Term Plans (STPs): These investments are meant for a horizon of three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs)
Ultra Short Term Funds: These funds have an investment horizon of as low as a month which has low mark to market component as they primarily invest in short term corporate debt papers and money market instruments.
Also known as Money Market Schemes, These funds provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1 day to 3 months.
Fixed Maturity plans commonly known as FMPs have predetermined fixed maturity date before which investors cannot withdraw their investments.
As the name suggest, they are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.