How to Start Investing

We often talk about How to Start Investing at an early stage by saving money, whether in terms of FD, buying gold, or investing in Real estate. However, making the right investment choice at the right place and at the right time is crucial. In today’s world, with a bunch of information and content online, it becomes extremely difficult to make the right choice. Hence, we have covered pretty much all the topics that you need to know to begin your investment journey.

What are Mutual Funds?

A mutual fund pools money from multiple investors to create a diversified portfolio managed by professionals. Mutual funds offer a convenient, low-risk way for beginners to invest in the market without needing deep investment expertise. Mutual funds are often classified by their principal investments: money market funds, bond or fixed income funds, stock or equity funds, or hybrid funds.

Types of Mutual Funds:- 

1. Equity Funds

Invest in stocks that offer high growth potential but with higher risk.
Includes large-cap, mid-cap, and small-cap funds, each targeting different company sizes.

2. Debt Funds

Focus on bonds and fixed-income assets, offering stability and regular income.
Includes government bond funds and corporate bond funds.

3. Balanced or Hybrid Funds

Mix stocks and bonds for balanced growth and stability, ideal for moderate risk tolerance.
Index Funds, Track a specific market index like the S&P 500, providing market-average returns with low fees.
Sector Funds, Concentrate on specific industries, such as technology or healthcare for targeted growth.
Money Market Funds

Note- Invest in short-term, high-quality debt that is ideal for emergency savings.

How To Choose The Right Mutual Fund?

– Selecting the right mutual fund is a complex decision to make, however, with the right amount of research and advice like this, the path becomes easier and here are a few steps to do so :

1. Define Your Financial Goals: Whether your goal is short-term savings or long-term growth, choose funds that align with your investment horizon.

2. Assess Your Risk Tolerance: Higher risk tolerance favors equity funds, while lower risk tolerance is better suited to debt or balanced funds.

3. Review Performance and History: Look for consistent performers with strong returns over the past 5-10 years.

4. Check the Fees: Fees impact your returns over time. Compare expense ratios and opt for funds with reasonable costs.

5. Understand Fund Holdings: Review the fund’s portfolio to ensure it aligns with your investment objectives.

Here are Some Top Performing Mutual Funds:

1. Large-Cap Funds
Quant Large Cap Fund and Bank of India Bluechip Fund are notable, with returns around 55% and 47%, respectively. These funds primarily invest in large, stable companies, making them potentially less volatile compared to smaller-cap funds.

2. Mid-Cap Funds
Mid-cap funds tend to offer higher growth potential with a bit more risk. The Quant Mid Cap Fund (72% return) and JM Midcap Fund (about 71%) have been top performers. Mid-cap funds focus on companies with significant growth potential, which can outperform during certain market conditions.

3. Small-Cap Funds
For higher-risk tolerance, small-cap funds like Bandhan Small Cap Fund (78%) and Mahindra Manulife Small Cap Fund (73%) have led in this category. These funds invest in smaller companies that can grow rapidly, though they can also be more volatile.

4. Multi-Cap and Flexi-Cap Funds
For more diversified exposure, HSBC Multi Cap Fund (63%) and Kotak Multi Cap Fund (61%) perform well across market caps. Similarly, JM Flexicap Fund (66%) and Bank of India Flexicap Fund (64%) provide flexible asset allocation, which allows them to adapt to various market conditions and offers a balanced approach.

Mutual Fund Returns

– Mutual Fund returns can vary on different scenarios like type of fund, investment, market condition, etc. Hence here is an overview of returns by mutual fund category.

1. Equity Mutual Funds: Historically, equity funds (large-cap, mid-cap, small-cap) have provided average returns between 10-15% annually over the long term. Small-cap and mid-cap funds often have higher growth potential but also greater volatility. Large-cap funds, like the SBI Bluechip Fund, might yield around 10-12%, while some top small-cap funds have yielded higher returns in bull markets but are riskier.

2. Debt Mutual Funds: Debt funds, which invest in fixed-income securities like bonds and government securities, are generally lower-risk and yield around 5-8% annually. Funds like SBI Short Term Debt Funds or HDFC Corporate Bond Fund often appeal to conservative investors seeking steady income.

3. Hybrid Funds: Balanced or hybrid funds, which invest in a mix of equities and debt, tend to yield moderate returns, typically around 8-12% over the long term. Funds like ICICI Prudential Balanced Advantage Fund have become popular for those seeking diversified exposure.

4. ELSS Funds: Equity Linked Savings Schemes (ELSS) offer tax benefits under Section 80C and have returns similar to diversified equity funds, usually around 12-15% over five years. Funds such as the Mirae Asset Tax Saver Fund and Axis Long Term Equity Fund have shown robust performance historically.

5. Index Funds: Index funds, which track a market index like the NIFTY 50 or SENSEX, generally deliver returns that mirror the index performance, around 10-12% on average, with lower expenses than actively managed funds.

Understanding Mutual Fund Returns

Mutual fund returns can be measured over different periods, such as 1-year, 3-year, 5-year, and 10-year returns. When evaluating funds, it’s helpful to consider the Compounded Annual Growth Rate (CAGR) for a more accurate measure of long-term performance and compare returns with their benchmarks to assess if a fund is outperforming the market. Keeping in mind, however, that past performance does not guarantee future returns.

For updated performance data and insights, platforms like AMFI, Morningstar India, or ET Money provide current returns for different mutual funds across various categories.

Selecting a mutual fund is always going to be a tentative decision. Hence, long-term performance will always be preferable over short-term investment. It is also required to keep track of funds, and one should have done enough market research before making any decision. Hence, setting clear investment goals is always advisable.