Newspapers, TV commercials, social media posts – all communication mediums seem to be majorly abuzz with an offering nowadays: Mutual funds. It has already proved to be one of the most attractive investment options for people with lucrative returns. Mutual funds investments are constituted when an Asset Management Company, in order to buy securities, collates investments from investors – both individual and corporate.
However, the market is flooded with a variety of mutual fund options, all promising the moon for you. The question arises: Which mutual funds should one invest in? In this blog, we give you a lowdown of the top mutual funds in 2021.
Types of Mutual Funds
Mutual funds investments are categorised on the basis of the types of securities they have in their portfolios and the type of return they expect. Some of the types of mutual funds are as follows:
- Equity funds:
This is the largest category of mutual funds investing in stocks. This is sub-categorised as small-cap, mid-cap and large-cap, decided by the size of the company invested in.
- Fixed-income funds:
These are investments that guarantee fixed return-rate, such as government bonds or debt instruments.
- Index funds:
This deals with stocks that correspond with a major market index. Target investors are those who are cost-sensitive.
- Balanced funds:
Invests in an amalgamation of different asset classes such as stocks, bonds, money market, etc. Aims at reducing the market risk via diversification.
- Money market funds:
These are low-risk, short-term debt instruments, namely government T-bills.
- Income funds:
Invests in government debt and other high-quality corporate debts. Aims at creating a steady flow of income for the investors.
- Global funds:
Invests only in international assets. It is beneficial when the economy of a foreign country outperforms that of your own country.
- Speciality funds:
These are all-encompassing well-known categories of funds.
- Exchange-traded funds:
Exchange-traded fund deals with stock exchanges. If you are looking for a cost-effective investment, this is tailor-made for you.
What should you consider while picking the mutual fund that works best for you?
- Investment objective:
Different mutual funds have different objectives. A thorough assessment of your long-term financial goal and your appetite for risk is necessary before you make your choice. If your objectives are long-term, then a short-term scheme will not serve the purpose. Also, if your appetite for risk is low, you would like to give high-risk funds a miss.
- Fund history: A proper fund history research of the mutual fund is necessary. This gives you a fair idea of how a particular mutual fund has fared during the bear run. You may opt for a fund with a good history of at least 5 years.
- Financial ratios:
Asses a fund’s risk-return potential. A financial ratio (Sharpe ratio and alpha ratio) does that for you. A fund with a higher Sharpe ratio is better than a fund with a lower Sharpe Ratio.
- Expense ratio: Fund houses charge an annual fee, in terms of percentage, from the investors for managing their money. This is called the expense ratio. A higher expense ratio means lower return as it eventually affects the fund’s return.
- Performances of the fund managers:
As fund managers handle your mutual funds investments performance of the fund manager is crucial.
Conclusion:Being aware of the various types of mutual funds options is a vital first step in investing in one. Solid research can help you shortlist the ones tailor-made to your requirements.