How to choose Mutual Funds to invest in 2024

Here’s everything you need to know and consider if you are looking to invest in mutual funds.
How to choose Mutual Funds
4 mins
01 Feb 2024

Mutual funds are a popular investment option for many investors who want to diversify their portfolio, reduce risk, and benefit from professional management. However, choosing the right mutual fund can be a daunting task, as there are thousands of schemes available in the market, each with different features, objectives, and performance. How can you select the best mutual fund for your needs and goals? Read on to know more.

Factors to evaluate when choosing mutual funds

  • Goals: The first step is to identify your financial goals and the time horizon for achieving them. Different mutual funds have different objectives, such as capital appreciation, income generation, tax saving, etc. You should choose a mutual fund that matches your goal and risk profile. For example, if you want to save for your retirement, you can opt for a balanced or hybrid fund that invests in both equity and debt instruments. If you want to save tax, you can invest in an equity-linked savings scheme (ELSS) that offers tax benefits under Section 80C of the Income Tax Act.

  • Risk: The second factor is to assess your risk appetite and tolerance. Mutual funds are subject to market fluctuations and can have varying degrees of risk, depending on the type and composition of the underlying assets. Generally, equity funds are riskier than debt funds, while small-cap funds are more risky than large-cap funds. You should choose a mutual fund that suits your risk profile and does not expose you to undue stress. For example, if you are a conservative investor, you can invest in a liquid or ultra-short-term fund that offers low risk returns. If you are an aggressive investor, you can invest in a sectoral or thematic fund that focuses on a specific industry or theme and offers high returns with high risk.

  • Liquidity: The third factor is to consider the liquidity of the mutual fund. Liquidity refers to the ease and speed with which you can buy or sell units of a mutual fund. Different mutual funds have different liquidity features, such as lock-in period, exit load, redemption limit, etc. You should choose a mutual fund that offers you the flexibility to withdraw your money when you need it. For example, if you want to invest for a short term, you can choose an open-ended fund that allows you to redeem your units at any time without any penalty. If you want to invest for a long term, you can choose a close-ended fund that has a fixed maturity period and offers a higher return potential. It is crucial to note that access to closed-ended schemes is limited, allowing investments only during the New Fund Offer (NFO) period.

  • Investment strategy: The fourth factor is to understand the investment strategy of the mutual fund. Investment strategy refers to the approach and philosophy adopted by the fund manager to select and manage the portfolio of the mutual fund. Different mutual funds have different investment strategies, such as growth, dividend, index, etc. You should choose a mutual fund that aligns with your investment style and preference.

  • Fund performance: The fifth factor is to evaluate the performance of the mutual fund. Performance refers to the returns and risks generated by the mutual fund over a period. You should compare the performance of the mutual fund with its benchmark and peer group, and consider the consistency and stability of the returns. You should choose a mutual fund that has delivered superior and consistent returns over the long term, and has outperformed its benchmark and category average. However, you should also remember that past performance is not a guarantee of future results, and you should review the performance of the mutual fund periodically.

  • Expense ratio: The sixth factor is to check the expense ratio of the mutual fund. Expense ratio is the annual fee charged by the mutual fund for managing your money. It includes various costs, such as management fee, distribution fee, etc. Expense ratio reduces the net return of the mutual fund, and hence, you should choose a mutual fund that has a low expense ratio. However, you should also consider the quality and value of the services provided by the mutual fund, and not compromise on the performance and suitability of the mutual fund for a lower fee.

  • Exit load: The seventh factor is to look at the exit load of the mutual fund. Exit load is the fee charged by the mutual fund when you sell units of the mutual fund. Exit load reduce the net return of the mutual fund, and hence, you should choose a mutual fund that has no or minimal exit load. However, you should also consider the liquidity and lock-in period of the mutual fund, and not invest in a mutual fund that has a high exit load and a long lock-in period.

  • Taxes: The eighth factor is to consider the tax implications of the mutual fund. Taxes are levied on the income and capital gains earned from the mutual fund, depending on the type and duration of the mutual fund. Generally, equity funds are taxed at 15% for short-term capital gains (less than one year) and 10% for long-term capital gains (more than one year), with a threshold of Rs. 1 lakh. Debt funds are taxed at the marginal tax rate for short-term capital gains and 20% with indexation for long-term capital gains. You should choose a mutual fund that offers you the best post-tax return, and take advantage of the tax benefits available for certain mutual funds, such as ELSS.

  • Direct plans: The ninth factor is to opt for direct plans of the mutual fund. Direct plans are the plans that allow you to invest in the mutual fund directly without any intermediary, such as a broker, agent, or distributor. Direct plans have a lower expense ratio than regular plans, as they do not include any commission or distribution fee. Direct plans offer you a higher return potential, as the savings in the expense ratio are added to your returns. You can invest in direct plans through the online platforms of the mutual fund houses or through third-party portals.

Why invest in mutual funds?

Investing in mutual funds offers several benefits, such as:

Diversification

Mutual funds allow you to invest in a variety of securities, across different sectors, industries, and markets, with a small amount of money. This reduces your risk and increases your chances of earning higher returns.
Professional management: Mutual funds are managed by qualified and experienced fund managers, who have the expertise and resources to research and analyse the securities and the market conditions. They make informed and timely decisions on your behalf, to optimize the performance of your fund.

Convenience

Mutual funds offer convenience and flexibility to the investors, as they can buy and sell the units of the fund online, through various platforms, such as websites, apps, etc. They can also track and monitor the performance of their fund, through regular statements, reports, and updates.

Transparency

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which ensures that the fund houses follow the rules and regulations, and disclose all the relevant information to the investors, such as the portfolio composition, NAV, returns, expenses, risks, etc.

Liquidity

Mutual funds offer liquidity to the investors, as they can redeem or sell their units of the fund at any time, based on the prevailing NAV, subject to the terms and conditions of the fund. Some mutual funds, such as liquid funds, offer instant redemption, while others, such as equity funds, may take a few days to process the redemption request.

Types of mutual funds

Mutual funds are investment vehicles that pool money from various investors and invest it in different assets such as stocks, bonds, money market instruments, etc. Depending on the asset class, investment objective, risk profile and structure, there are various types of mutual funds in India. Some of the common types are:

  • Equity funds: These funds invest mainly in stocks of different companies. They aim to generate capital appreciation over the long term. They are suitable for investors who have a high risk appetite and a long investment horizon. Equity funds can be further classified into large-cap, mid-cap, small-cap, multi-cap, sectoral, thematic, index, etc.
  • Debt funds: These funds invest primarily in fixed-income securities such as bonds, treasury bills, corporate debentures, etc. They aim to provide regular income and capital preservation. They are suitable for investors who have a low to moderate risk appetite and a short to medium investment horizon. Debt funds can be further classified into liquid, overnight, ultra-short, short-term, medium-term, long-term, dynamic, gilt, credit risk, etc.
  • Hybrid funds: These funds invest in a mix of equity and debt securities. They aim to provide a balance of growth and income. They are suitable for investors who have a moderate risk appetite and a medium to long investment horizon. Hybrid funds can be further classified into aggressive, balanced, conservative, dynamic, arbitrage, equity savings, etc.

Apart from these, there are also some other types of mutual funds such as solution-oriented funds, which cater to specific goals like retirement, children’s education, etc., and fund of funds, which invest in other mutual funds.

How mutual funds work

Mutual funds are a type of investment vehicle that pool money from many investors and invest it in various securities such as stocks, bonds, and money market instruments. Mutual funds are managed by professional fund managers who aim to generate returns for the investors while keeping in mind their risk appetite and investment objectives. Mutual funds offer several benefits such as diversification, liquidity, convenience, and tax efficiency.
In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which lays down the rules and guidelines for the formation, operation, and disclosure of mutual funds. Mutual funds in India are classified into different categories based on their asset allocation, investment strategy, and risk profile. Some of the common types of mutual funds in India are equity funds, debt funds, hybrid funds, index funds, and sectoral funds. Investors can choose the mutual fund schemes that suit their needs and goals, and invest in them through various modes such as lump sum, systematic investment plan (SIP), and systematic transfer plan (STP).

Things to consider before investing in multicap funds

  1. Investment objectives: It is crucial to define your investment objectives clearly. To maximise returns from these funds, it is advisable to have an investment horizon of at least 5 years.
  2. Risk: Investing in multicap funds entails exposure to stock market risks. Short to medium-term market fluctuations can be unpredictable, so investors must be comfortable with the inherent volatility associated with stock investments.
  3. Expense ratio: Understanding the expenses impacting your returns is essential. Asset management companies charge an expense ratio to manage the multi-cap fund you are considering. This fee covers administrative and operational expenses, including the fund manager's compensation, and is typically charged annually.

How to invest in mutual funds on Bajaj Finserv platform?

Investing in mutual funds through SIP on the Bajaj Finserv platform is quite simple and hassle-free. Follow these steps to start your SIP investment journey:

  1. Visit the Bajaj Finserv website or app and navigate to the ‘Mutual funds’ section.
  2. Click on INVEST NOW.
  3. Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list.
  4. All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating.
  5. Get started by entering your mobile number and sign in using the OTP.
  6. Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video.
  7. Enter your bank account details.
  8. Upload your signature and provide some additional details to continue.
  9. Choose and select the mutual fund that you want to invest in.
  10. Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’.
  11. Select your payment mode i.e., Net Banking, UPI, NEFT/ RTGS.
  12. Once your payment is done, the investment will be complete.

Conclusion

These are some of the factors and information that can help you choose the best mutual fund for your investment needs. However, you should also do your own research and analysis, and consult a financial advisor if needed, before investing in any mutual fund.

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Frequently asked questions

What is a mutual fund?

A mutual fund is a type of investment vehicle that pools money from many investors to purchase securities like stocks, bonds, and other assets. It’s managed by professional fund managers who aim to produce capital gains and income for the fund’s investors.

What advantages do investing in mutual funds offer?

Mutual funds offer diversification, professional management, and liquidity. They allow investors to invest in a diversified portfolio of securities with a small amount of money, which can reduce risk.

How do I choose the right mutual fund for me?

Choosing the right mutual fund involves understanding your financial goals, risk tolerance, and investment horizon. Look at the fund’s past performance, expense ratio, and the reputation of the fund house.

How many mutual funds should I have in my portfolio?

The number of mutual funds you should have in your portfolio depends on your investment goals and risk tolerance. However, having too many funds can lead to over-diversification and make it difficult to manage your portfolio.

What are the risks of investing in mutual funds?

Investing in mutual funds involves risks such as market risk, credit risk, and liquidity risk. The value of your investment can go down depending on factors affecting the stock market. Also, while mutual funds are generally liquid, some funds may charge a fee for early withdrawals.

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