Mutual fund is a tried and tested financial instrument to create long term wealth.
Equity Mutual Fund has that capacity to generate returns more than any other instrument which are inflation hedged with calculated risk. Investment in equity mutual fund can be First one is Lump sum payment and other one is through SIP. Systematic Investment Plan is a great tool to invest in a staggered manner allowing investor to invest small amounts periodically i.e. weekly, monthly or quarterly. Investor can start investing in mutual fund through SIP by minimum of Rs. 500 only. Some scheme also have provision of monthly SIP of Rs.100. SIP is the best vehicle to invest in Equity Mutual fund systematically.
Types of mutual funds:
Basic 2 types: 1. Passive mutual funds 2. Active mutual funds
Passive mutual funds:
Passive mutual funds are those mutual funds which are not managed by active fund managers. These mutual funds are simply followed the market index for which it is attached. So if that index increases value of that passive mutual fund also increases and vice versa. Examples passive funds are ETFs and Index Funds. So it is somewhat lesser risky that Active managed funds.
Active Mutual Funds:
Active mutual funds are those mutual funds which are managed actively by fund managers. Fund managers use their discretionary knowledge and power to generate Alpha for these mutual funds. Fund manager’s performance and ability is one of the factors on which mutual funds performance is based.
Following are the different types of Active Mutual Funds
Large cap Funds: Large cap funds are those funds which invest a larger proportion of their corpus in companies with large market capitalization. These stocks are blue chip stocks. So the risk is relatively lesser as all companies are stable and growing.
Multicap Fund: These are diversified mutual funds which can invest in stocks across market capitalization. …Be it Large cap , mid cap or small cap. Fund manager decides the proportion of investments in Large, Mid and small cap as per market conditions. These funds are getting popularity day by day.
Mid cap Funds: A mid–cap fund is a type of investment fund that focuses its investments on companies, Mid-cap companies have a market capitalization of INR 500 to INR 10,000 crores. These companies are growing companies have a potential to be future bluechip companies.
Small cap funds: Small-cap Equity Funds are those which invest in equity shares of companies which have smaller capitalization and listed under the 250th rank of the underlying benchmark. These stocks are in their initial years , growing rapidly but success rate may be not great for every company. So these companies are considered very risky.
Aggressive balanced funds: Aggressive hybrid funds are equity oriented hybrid schemes which aim at wealth accumulation and regular income over the long run. It has 60% equity and 40% debt.
I have listed all Equity mutual funds for your understanding of risk level associated with each equity fund.
I recommend you to invest in Index Fund initially then after 3 months try ETFs and Aggressive balanced fund.
As you get familiar with the mutual fund world you can add Large cap and Multicap. And if you are risk taker add Mid and Small cap fund in smaller proportion.
Normally I advise my clients to build your equity portfolio based on Core and satellite approach. In this pattern, more proportion of money is invested in Large and Multi cap fund. The large-cap can generate 10 to 12% returns for SIP investments. These funds provide stability and minimize the downside risk of the market. The smaller portion is invested in good quality in Mid and Small Cap as satellite portfolio which has the potential to generate 15 to 18% returns. This can help my clients to accumulate long term wealth with well calculated risk.