A Comprehensive Insight into the Best Performing Mutual Funds

Investors of mutual funds are assigned the respective fund units corresponding to the amount invested. They will gain profits or losses that are directly proportional to the amount they invest. Best performing mutual funds give investors exposure to investing in a wide and well-managed portfolio. The primary objective of the mutual fund manager is to provide optimal returns to the investors by allocating their funds in those instruments that align with the mutual fund objectives.

The performance of a mutual fund depends upon the effectiveness of the underlying assets. The best performing mutual funds are those that give optimal returns to the investor. This article talks about the function of mutual funds and the best performing mutual funds in the market.

What are Mutual Funds and how are they set up?

A mutual fund is a fund pool established in the form of a trust where finance is raised by selling units to the public or a portion of the public. They are invited to invest in securities, gold, money market instruments, real estate, and other assets. Simply put, a mutual fund is a common finance basket where many investors pitch in their contribution and the amount collected thus is then invested as per the mutual fund’s investment objective.

Mutual funds are invested and operated by mutual fund managers who invest the funds aligned with the specific objective with an aim to create appreciation or growth in the value of the amount invested by the customers. For instance, debt funds are typically invested in fixed income instruments such as government securities, bonds and debentures while equity funds can be invested in equity shares, convertible debentures and so on.

A mutual fund is established as a trust by a sponsor or a promoter and managed by certain trustees, the sponsor, the Asset Management Company and a custodian.  The mutual fund trustees are the holders of the property that benefit the mutual fund unit holders. The custodian is registered with the Securities and Exchange Board of India (SEBI) holds custody of securities of various schemes. The trustees are directed and monitored by the AMC to see if they are complying with the SEBI regulations for mutual fund management.  

Professional managers with expertise in the equity and debt funds are employed by the AMC to collect funds from the investors and invest them appropriately. All AMC’s are ruled by the Board of Directors and fall under the SEBI Regulations Act.

Types of Mutual Funds

Best performing mutual funds can be broadly classified into Debt Mutual Funds, Equity Mutual Funds, and Hybrid Funds.

Debt Mutual Funds

Debt mutual funds mainly invest in securities that generate fixed income as the primary objective of debt funds is to generate steady returns in a short time period. Debt funds include funds that fall under the moderate risk category. Funds are mainly allocated towards government securities, corporate bonds, and less risky fixed-income securities that can generate regular ROI. Debt funds are ideal for investors with a moderate risk appetite and can be any of the following:

• Income Funds
• Dynamic Bind Funds
• Liquid Funds
• Glitch Funds
• Short-term funds

Equity Funds

Around 65% of investments in equity funds are diverted towards equities and related securities. Equity funds fall under the moderate to high-risk investment category ideally suited for investors with a higher risk appetite. With equity funds, typically, the risks are as high as the return on the investment, but the overall performance of the mutual fund depends upon the market scenario. Equity funds can be classified into:

• Small-cap fund
• Mid-cap fund
• Large-cap fund
• Multi-cap fund
• Thematic fund

Hybrid Funds

Hybrid funds are a combination of equity and fixed instruments and fall under the medium-risk category. Hybrid funds are a good mix of stock markets and debt instruments. Hybrid funds are best suited for investors with a medium to low-risk appetite who wish to enjoy the benefits of a profitable market with minimum risk. Hybrid funds can be:

• Debt Hybrid fund
• Equity Hybrid fund
• Monthly income plans
• Arbitrage funds

Money Market Funds

These funds fall under the lowest risk category. These comprise investments in money market instruments, cash, and bank deposits where there is minimum risk involved. But the returns on investment are also relatively low from these finds when compared to other funds.

Benefits of Best Performing Mutual Funds

Given below are the main benefits of investing in the best performing mutual funds:

1. Expert management of finances

The entire mutual fund investment is managed by the mutual fund manager who is a professional in mutual fund investment having the required knowledge and expertise. These managers typically have an enviable track record of managing many investments and are also backed by a team of analysts and experts. Investors can leverage this know-how to ensure that their finances are diverted to high-performing assets and stock that have the maximum potential of giving returns to investors in the long run.

2. Convenience

Investing in mutual funds is the quickest and most convenient form of investment. There is no direct communication between the investor and the market as the investor just needs to register with the fund of his choice and begin investing. The investor need not monitor his investment or the financial market very often as the portfolio manager takes care of its performance.

3. Tax benefits

Investors can get tax exemption under Section 80- C Income Tax Act by investing in mutual funds. The premium paid as well as the contribution made to the ELSS and the ULIP plans are eligible for tax rebates. They can get up to Rs. 1.5 lakh exemption by investing in Equity Linked Saving Scheme (ELSS).  

4. Economies of Scale

Mutual funds boost economies of scale. When an investor chooses to buy a mutual fund in place of stocks, he can save on transaction costs. If an individual has a low investment budget, he cannot purchase a high priced stock but he can buy mutual funds. Mutual funds bridge the gap between various investment limits by accumulating funds from small investors and investing in high-performing stocks and marketable securities that an individual investor cannot afford. This method of aggregate investment reduces the transaction costs and benefits individual investors.

5. Goal-based

Individuals invest in mutual funds to meet their short-term and long-term financial objectives. Mutual fund investments are goal-based funds that offer a variety of options to cater to each customer’s investment horizon and risk appetite.

6. Fund Switching allowed

Both ULIP and mutual fund investments offer the fund switching facility. If the investor wishes to move to a different fund in the same portfolio, they have the flexibility to switch their investment to a different fund. A knowledgeable investor can understand when to enter or exit a specific fund depending upon its potential to perform in the market, and then make the fund switch.

Performing Mutual Funds

Given below are the best performing mutual funds for the year 2021:

*Policybazaar does not endorse, rate or recommend any particular insurer or insurance product by an insurer or any other financial product.

** The investment risk in the investment portfolio is borne by the policyholder

How to choose the Best Performing Mutual Fund for you?

Investments in mutual funds are risky but also have the potential to offer a high rate of returns than any other mode of investment. But choosing the right fund is not a very simple task as there are several important factors to consider such as risk, diversification, returns, liquidity and so on. You must keep in mind the factors below before you choose the best performing mutual fund for you:

1. Identify Personal Financial Objective and Investment Goal

Before narrowing down on the mutual fund, the investor must analyze their personal financial objective and long-term goals. The choice of the ULIP or mutual fund must align with these investment goals.

For instance, some investors may be looking for long-term investment and some for short term investment. Some may be saving for retirement and some may be saving up for education. With over 1000 mutual funds in the market, it is very crucial to identify your financial goal before digging into the fund pool.

2. Risk Tolerance Level

It is a known fact that mutual funds are subject to risks based on market scenarios. This risk factor must feature in your investment decision of mutual funds. For instance, some investors will not wish to take up market risks while those who have a higher risk appetite may only focus on investments that generate high returns.

It is advisable for new investors with less knowledge of the market to choose debt funds or large-cap equity funds that are less risky. Large-cap funds are less impacted by market fluctuations as they invest in companies with more market capitalization. Debt funds are less risky because they invest in corporate bonds and government securities.

Investors who have a higher tolerance for risk, on the other hand, can go for funds that give high returns such as small-cap or mid-cap equity funds.

3. Managerial Expertise

Before you finalize a specific mutual fund investment, you must understand how your funds will be managed as some funds require expert management as some funds are actively managed while some are passively managed.

The fund manager must possess enough expertise to research and analyze the market, study various sectors, and economic trends before choosing the investment portfolio that can fetch maximum returns.

4. Assets under Management (AUM) and other Costs

It is pertinent to understand the Assets under Management (AUM) of a mutual fund as the AUM defines the fund size, the number of assets under it, its potential and capability. A high AUM sometimes can expose the fund to high market risks.

Other costs such as exit load and an expense ratio of mutual funds must also be taken into account as these expenses are a part of the investment returns. While SEBI allocates a maximum expense ratio of 1.5%, sometimes it can go higher as well. It is advisable to avoid mutual funds with rigid exit loads as well.

5. Choose between Direct or Regular Funds

You must also evaluate if the mutual fund plan you are choosing is a direct one or a regular one. Direct plans allow investors to invest in schemes without the indulgence of a middle man while regular plans require the services of an investment broker or an agent.

6. Check Fund’s Current and Past Performance

The past and current performance of a mutual fund are good indicators of a fund’s potential. You can understand the consistency the fund has maintained over the years and how it has accomplished its objectives. Three-year and five-year returns can help the investor compare the fund’s performance and differentiate it from the benchmarks.

7. Analyze the Fund’s Flexibility

Another crucial factor to remember while choosing a mutual fund is its flexibility. Mutual funds typically offer the required flexibility as they can pick from a wide range of investment options according to their need and investment horizon. The investment must also allow them to shift to another fund in the portfolio if necessary.  

8. Evaluate Stability and Risk Profile of the Fund

To get the best out of your mutual fund investment, the investor must analyze their financial stability and risk profile. Both these factors depend upon the age of the investors. While young individuals who generally have a higher risk appetite may prefer equity investments as compared to older investors, who may choose debt instruments.  

You can invest in the best performing mutual funds either through a lump sum amount or via a SIP (Systematic Investment Plan). In lump-sum investment, the investor deposits all the money at once while with SIPs, he can deposit his funds at regular time intervals based on his preference and ability.