Most Useful Mutual Funds
Mutual funds are available in numerous varieties. We can choses the funds that cater to our investment goals and risk tolerance. Let’s discuss the most useful mutual funds.
Table of Contents
By Investment Objective
Growth Mutual Funds
These funds aim for capital appreciation over the long term by primarily investing in stocks of companies with high growth potential. They offer potentially high returns but these are highly volatile (price fluctuations) compared to other types. For example- Midcap, Small Cap funds.
Income Mutual Funds
These funds prioritise generating regular income for investors, typically through investments in bonds or dividend-paying stocks. They have lower long-term growth potential compared to growth funds, and bond prices can be affected by interest rates. Example – Debt mutual funds, Money market funds, liquid funds etc.
Balanced Mutual Funds
These funds offer a mix of stocks and bonds, seeking a balance between growth potential and income generation. They offer moderate growth with some income. These funds may have more volatility than income funds but less than growth funds. Example- Hybrid funds.
By Asset Class
Stock Mutual Funds
These funds primarily invest in stocks of companies from different sectors of the economy. They provide potentially high returns but have higher volatility due to fluctuations in the stock market.
Debt Mutual Funds
Debt mutual funds invest in fixed-income assets such as bonds, government securities, and corporate debt. They offer safety and stability compared to equity funds. They are ideal for short to medium-term goals, such as saving for a vacation, an emergency fund, or a big purchase. They provide steady returns with lower risk. Returns depend on interest rates—falling rates may increase returns while rising rates can slow their growth.
Multi Asset Allocation Mutual Funds
Multi-Asset Allocation Mutual Funds invest in at least three asset classes, such as equity, debt, and gold. These funds offer a built-in diversification. This balance helps reduce risk, as underperformance in one asset can be offset by others. The fund manager adjusts allocations based on market conditions, providing flexibility and adaptability. These funds are ideal for investors seeking a simple, all-in-one solution that combines growth, stability, and safety, making them a smart choice for navigating different market conditions.
Active vs Passive Mutual Funds
Active Funds
In active funds, a fund manager picks stocks or bonds for you. They aim to outperform the market by using research, analysis, and strategy. Active funds can deliver higher returns if the manager makes the right choices. But they also carry more risk since they depend on the manager’s decisions. These funds usually have higher fees because of the hands-on management.
Passive Funds
Passive funds are simpler. They don’t try to beat the market—they just track it. For example, an index fund mimics the performance of a market index like the Nifty or Sensex. There’s no active decision-making, which means lower costs. Passive funds are less risky and are great for beginners or those looking for consistent, predictable returns.
Fund management styles are of two types: actively managed funds and passively managed funds.
Regular vs Direct Mutual Funds
Regular and Direct plans are two ways of investing in the same fund but have one key difference—who you invest through.
Regular Mutual Funds
In a regular plan, you invest through a broker, advisor, or your bank. They guide you in choosing funds and handle the process for you. For this service, they earn a commission, which is added to the fund’s expense ratio. This means your returns may be slightly lower because of the higher cost.
Direct Mutual Funds
A direct plan allows you to invest directly with the mutual fund company, without a middleman. There’s no commission, so the expense ratio is lower. Over time, this can lead to higher returns. However, you’ll need to research and manage your investments on your own. The difference between the two is regular plans are “sold” vs direct plans are “bought”.
The expense gap between regular and direct mutual fund plans is typically around 0.5% to 1% per year of the invested amount. While this might seem small, over time, it can significantly impact your overall returns due to the power of compounding.
Dividend vs Growth Mutual Funds
Dividend Mutual Funds
In a dividend plan, the fund pays out some of its profits as regular dividends. You get these payouts during the investment period. These mutual funds give you periodic income. It’s a great choice if you want cash flow, like retirees who need regular income. But keep in mind, the payouts reduce the fund’s NAV (price), so your overall wealth grows slower.
Growth Mutual Funds
In a growth plan, the fund doesn’t pay out dividends. Instead, all the profits are reinvested into the fund, helping it grow over time. The NAV of the fund increases, and you benefit from compounding. It’s perfect for long-term goals, like buying a house, funding education, or building wealth for retirement.
ELSS Mutual Funds
ELSS (Equity Linked Savings Scheme) mutual funds are a tax-saving investment option that helps you grow wealth while saving up to ₹1.5 lakh under Section 80C. These funds invest primarily in equities, offering the potential for high long-term returns. ELSS funds have a 3-year lock-in period. ELSS provides quicker liquidity compared to other tax-saving options like, Insurance policies, PPF, FDs etc. It is flexible for different budgets as you can invest through a lump sum or SIP. Beginner investors should start their investing journey through ELSS. The lock-in period develops discipline and patience in new investors.
Large Cap Mutual Funds
Large cap mutual funds invest in the first 100 largest companies according to market capitalisation which are listed in stock exchange. These schemes have to invest a minimum of 80% of the pooled funds into large cap companies. In general, the majority of large cap mutual funds fail to outperform their benchmark. The major constraints faced by these funds are increased market efficiency, a limited investment universe, higher expense ratios and portfolio constraints. Large cap mutual funds are known for lower but stable returns. Investors may be better off by investing in Index funds than actively managed large cap funds.
Mid Cap Mutual Funds
Midcap mutual funds in the companies are those which are ranked between 101 and 250 in terms of market capitalisation. Majority of active midcap schemes have outperformed their benchmark index. This is primarily due to the relatively larger investment universe which enables fund managers to seek out undiscovered opportunities. This category of fund has high growth companies that are on their way to become largecap. The companies are usually in the middle in terms of volatility in comparison with Large cap and Small cap funds.
Small Cap Mutual Funds
Small cap mutual funds invest in the companies that are ranked beyond 250 in terms of their market capitalisation. These schemes offer high returns at high risk. Small cap funds can be very volatile. The investors should avoid investing in these funds for short term goals. But if someone can stay invested for 5-7 years then these funds can generate magnificent returns.
Flexi Cap Mutual Funds
Flexi-cap mutual funds invest in large-cap, mid-cap, and small-cap companies. The fund manager adjusts the allocation to balance stability and growth—large caps provide steadiness, while mid and small caps offer higher growth potential. This diversification makes flexi-cap funds ideal for investors who want a mix of stability and adaptability without worrying about market timing. Theoretically, flexi cap mutual funds offer optimal exposure to stock in all three market capitalisation segments. But, most of these schemes maintain approximately 60% exposure to large cap stocks and allocate only the rest of funds to midcaps and smallcaps. Despite this, this scheme has proven successful historically. Flexi cap mutual funds are suitable for new investors.
Multicap Mutual Fund
Multicap funds are a type of mutual fund that invests in companies of all sizes—large-cap, mid-cap, and small-cap. They must invest at least 25% of the portfolio in each of these categories. This rule ensures your money is evenly spread across different-sized companies. The remaining 25% of the portfolio can be invested by the fund manager wherever they see fit. During times of economic growth, they might use this 25% to invest more in mid-cap and small-cap stocks for higher returns. But in volatile markets, they may shift this portion to large-cap stocks to add stability.
Sectoral Funds
Sectoral funds are also known as thematic funds. These funds focus on a specific industry sector, such as technology or healthcare. These can generate potentially high returns if the chosen sector performs well. The entry and exit timing matters more in case of these funds. These funds have higher volatility due to concentration in a particular sector. These funds perform in cyclic fashion, they go up then down then up and so on.
Fund of Funds
A Fund of Funds (FoF) is a mutual fund that invests in a portfolio of other mutual funds. It provides diversification by investing in different types of funds, such as equity, debt, or international funds. They help to spread the investment risk. However, FoFs may have higher costs due to their own expenses and those of the underlying funds. They’re ideal for investors seeking simplicity and variety without the hassle of managing multiple investments. These funds are a great all-in-one solution for your portfolio.
Global Mutual Funds
Global mutual funds invest in international stocks, bonds etc. These offer the opportunity to invest into markets around the world without the cumbersome process of paperwork. They provide diversification by exposing your portfolio to companies in regions like the US, Europe, and beyond, which can balance risks if the Indian market underperforms. However, they come with added risks like currency fluctuations and geopolitical factors, and slightly higher fees. Global funds are best for long-term investors with a higher risk appetite who want to expand their investment horizons and benefit from global growth.
