In recent times, there has been a shift in the investment landscape in India, with more and more people turning to mutual funds. These funds offer the potential for wealth creation and are known for their ease of investment. One popular method of investing in funds is through systematic investment plans aka SIPs. SIP investments have become incredibly popular due to their simplicity and affordability. According to the data from AMF, it has become so prevalent that 69.7 million SIP accounts are present through which mutual funds investments take place daily. They allow investors to regularly invest a fixed amount of money in different types of mutual funds.
When selecting the best mutual fund for your SIP, it’s crucial to understand the various options available. Each type of fund has its own unique characteristics, risk profile, and potential returns. In this article, we will explore the types of funds that can be used for SIPs in India and provide you with insights to make informed investment decisions.
1. Equity Mutual Funds
Until September 2021, The Association of Mutual Funds in India (AMFI) reports that equity mutual funds account for 45% of the assets under management (AUM) within the Indian mutual fund industry. Equity mutual funds primarily invest in stocks or shares of companies. These investment funds have the potential to generate returns. They also carry a greater level of risk due to the unpredictable nature of the market. Equity mutual funds can be categorized into three types based on the market value of the stocks they invest in: cap, mid-cap, and small-cap funds. This is ideal for investors who are looking for long-term investment, at least for about 5 years or more, and who like to wear higher market returns and potentially higher returns.
2. Debt Mutual Funds
Debt mutual funds are investment vehicles that put money into fixed-income securities, including government bonds, corporate bonds, and money market instruments. These funds are generally considered to be less risky than equity mutual funds while providing relatively lower returns. Debt mutual funds are further divided into categories such as liquid funds, ultra-short-term funds, and long-term debt funds, each with its own risk-return characteristics. This is ideal for investors who are looking for capital preservation and a stable return.
3. Hybrid Mutual Funds
In 2021, hybrid mutual funds, also known as balanced funds, accounted for approximately 16% of the total assets under management (AUM) in India. Hybrid mutual funds aim to strike a balance between equity and debt investments. Typically, they invest in a combination of stocks and bonds, with the specific allocation based on the fund’s objective. Hybrid funds offer diversification and moderate risk, making them suitable for investors who seek a balance between capital appreciation and income generation. This is ideal for investors who are looking for growth as well as stability in their portfolio.
4. Tax-Saving Mutual Funds (ELSS)
Statistics reveal that equity-linked savings schemes (ELSS), a type of mutual fund aimed at tax-saving purposes, made up a smaller fraction, around 3%, of the total assets under management (AUM) in 2021. An overview of ELSS funds shows that they require a lock-in period of three years and provide tax benefits under Section 80C of the Income Tax Act. These funds primarily invest in equity and offer an opportunity for wealth creation while also facilitating tax savings. ELSS funds are particularly advantageous for individuals seeking to save on taxes while participating in the equity markets. This is ideal for investors who are optimistic, have long-term wealth creation goals, and are looking for tax benefits as well.
5. Index Mutual Funds
According to statistics, index mutual funds gained popularity, accounting for around 4% of the total AUM in India in 2021. Index mutual funds aim to replicate the performance of specific stock market indices, such as the Nifty 50 or Sensex. These funds provide a cost-effective avenue for investing in the wider market and are well-known for their passive investment strategy. If you compare index funds to actively managed funds, they generally have lower expense ratios. This is ideal for people who are cost-conscious and are seeking market returns without active fund management.
6. Sectoral and Thematic funds
In 2021, the factorial and thematic funds comprised a smaller portion, around 4% of the AUM. Sectoral and thematic funds are basically funds that are invested in specific sectors or themes like technology, infrastructure, or healthcare. These funds can be really profitable and provide higher returns if the sector or theme that is chosen performs really well. Due to their concentrated exposure, they are also risky. These types of funds are ideal for people who have strong beliefs and knowledge about a particular sector or theme. And they also believe in its growth prospects.
7. International mutual funds
In 2021, international mutual funds had a relatively smaller share, which was only one percent of the AUM. These points point to investing in assets that are outside India, and they offer diversification beyond domestic markets. These funds invest in assets derived from foreign equity bonds or a mix of both. It is ideal for investors who are looking to invest beyond Indian markets in a diversifiable portfolio as well as participate in global growth.
8 Exchange-traded funds
As of 2021, of the total AUM, ETFs in India accounted for approximately 3%. One can say that exchange-traded funds are similar to index points, but they trade on the stock exchange, which is like individual stocks. From liquidity, transparency, and low cost, they provided all. They can track various indices or assets, which makes them suitable for different investment objectives. It is ideal for investors who prefer trading flexibility and liquidity.
Conclusion
There is no doubt that systematic investment plans have made investing easier in India. When you are choosing the best mutual fund for you, you should consider some factors like your financial goals, risk tolerance, and investment horizon. You should definitely consider a financial advisor for personalized investment advice. You should start from small and then gradually upscale. This ensures safety and minimizes risk of funds.
