Stock market investing offers the opportunity to earn higher returns albeit at greater risks. One way to benefit from stock investing while mitigating some of the risks is investing through mutual funds.
Asset management companies (AMCs) pool funds from several investors through different mutual fund schemes. The money is then invested in different financial products, such as equities, debt, and government securities. The fund objectives of each mutual fund scheme are clearly defined in the prospectus.
Mutual Funds in India may be classified according to several categories. Here are three of the most common ones:
Open-ended and close-ended
You may enter or exit from open-ended mutual fund schemes at any time as per your requirements. On the other hand, close-ended schemes do not offer such flexibility. You may invest and exit these schemes only during the specified times.
One of the open-ended mutual fund schemes currently introduced in the market is the Tata Quant Fund.
Large, mid, and small cap
This classification is based on the size of the companies where the money is invested. Large-cap mutual fundsinvest a higher portion of the corpus is companies with greater market capitalization. These mutual funds are less risky because companies invested in have a large market capitalization with several years of performance record.
Mid-cap funds invest in mid-sized companies and pose some level of risk but also offer an opportunity to earn higher returns.
Finally, small-cap mutual funds are high-risk high-returns schemes because they invest in small companies with the potential to deliver exceptional growth.
Another classification method is based upon how the mutual fund invests the pooled money. If a scheme primarily invests in stocks, it is categorized as an equity mutual fund. When the scheme puts most of the funds in debt products like government securities, corporate bonds, or fixed deposits, it is known as a debt fund. Balanced funds invest the corpus in both equity and debt products.
There are several AMCs that offer a large number of mutual fund schemes. Let us now understand how to invest in mutual funds:
You must first identify schemes that match your investment objectives. Some of the factors you should consider include liquidity, expected returns, and your risk appetite.
The next step is to evaluate the performance of various mutual funds available in India. One way to do this is to identify the top five performers within your investment objectives. You must then check the returns of these schemes over different time horizons and check if they offer consistent returns or at least perform better than the benchmark.
An important thing you must remember when investing in mutual funds is diversification. It is recommended you choose two or three schemes that match your requirements and distribute your investment amount among these. This helps to mitigate your risk.
An often overlooked factor when comparing mutual funds is the costs. Some of these include management fees, exit loads, and annual expenses. These additional expenses may reduce your overall returns and are an important consideration.
Some mutual funds schemes also offer tax benefits. These equity-linked savings schemes (ELSS) allow you to save tax on up to Rs. 1.5 lakh. In addition to that, the interests you earn on that money are also considered tax free.
Investing in mutual funds offer several benefits due to the recent changes made by the Securities and Exchange Board of India (SEBI). Confused in choosing the right mutual fund, then you can read about Rank MF, which is a tool presented by SAMCO.