Today, everybody is making money in the stock market. The proof lies in the exceptional surge in demat accounts in the last two years and the previous quarter, in particular. Where RD and FD interest rates have dwindled, capital market and mutual fund returns have only compounded. The market is lucrative; if you don’t have the expertise to pick the right stocks, take the mutual fund route.
Let us discuss mutual funds and the best small cap mutual funds in India to kickstart your investment journey.
How do mutual funds work?
You might not have the technical expertise and risk appetite to directly invest in stocks. But that should not deter you from stock market investment. You can choose a mutual fund and still see your money grow in double-digit percentage figures!
A mutual fund is a collective investment instrument. A professional fund manager (an experienced finance professional) manages the fund. It collects money from different individuals and pools it together to invest collectively. The fund manager then invests the money in different financial instruments (stocks and bonds) based on a thorough risk assessment.
The return that’s generated by the fund is distributed proportionately among the individual participants. Deductions include the expenses, levies and the mutual fund fees. These are calculated based on the Net Asset Value (NAV).
Advantages of investing in mutual funds
Mutual funds have been around since the Licence Raj in India but it never really took off. People were sceptical of investing in the capital market back then. But the scenario changed when the Indian economy was liberalised and private fund houses entered the market.
Here are the major benefits:
- Compounding returns
A bank offers a fixed simple interest rate on your investment and it is very limited. A mutual fund gives you an ROI in the form of a varying compound interest.
- Diversified portfolio
The fund manager invests your money in various stocks and bonds. This broadens your investment profile. It also largely protects you from market risks.
- Limited risk
Like all financial investment, mutual funds come with financial risk. But the risk is limited on account of smaller investments and the diversified equity portfolio.
- Professional financial help
The fund is managed by a professional who has a team to research the equity and bond market. He or she picks individual stocks based on analytical data rather than emotion or speculation.
- Builds long-term wealth
Small, regular investments in a mutual fund is sure to build wealth in the future. Many Indian mutual funds outperform their global counterparts and create wealth for their investors.
Types of mutual funds
Here’s an overview of the different mutual fund schemes in India:
- Open and close-ended
Open-ended: No maturity date, so you can invest indefinitely.
Close-ended: You receive your returns on a fixed timeline.
- Exchange-traded funds
These are invested in various securities to beat a benchmark index. The fund is traded on an exchange just like an individual stock.
- Debt funds
This plays safe. It is ideal for those who wish to avoid risks. It invests only in fixed-income securities.
- ELSS funds
Equity-linked savings schemes (ELSS) are tax-saving mutual funds that mostly invest in equity-oriented securities. They offer tax benefits up to Rs. 150,000.
- Growth funds
These mutual funds generate long-term growth. The money is invested in equity assets with a good future growth forecast. The equity asset class has historically generated maximum returns.
- Income funds
These funds are invested in fixed-income securities like:
- government bonds
- debenture instruments
- corporate bonds.
The interest generated on the underlying investment is the income generated in these funds.
Best-performing mutual funds in India
Small-cap funds have given the most return if you analyse the performance of mutual funds. The point of investing in a mutual fund is to grow your income steadily but surely. And without constant redemptions! You should choose the best small cap mutual fund based on things like fund performance in the last decade and alpha generation by the fund manager.
Let’s see which mutual funds have generated good wealth for investors.
- Quant Small Cap Fund
- AUM: 17,193 Cr
- 3Y Returns: 42.67%
- Nippon India Small Cap Fund
- AUM: 46,044 Cr
- 3Y Returns: 34.64%
- HSBC Small Cap Fund
- AUM: 13,746 Cr
- 3Y Returns: 33.89%
- HDFC Small Cap Fund
- AUM: 28,598.92 Cr
- 3Y Returns: 31.97%
- Tata Small Cap Fund
- AUM: 6289 Cr
- 3Y Returns: 31.37%
Key Takeaway
Investing in a mutual fund could be your path to building a wealth legacy for your family to fall upon. It’s the best way to exploit the capital and bond markets that come with limited financial risk. However, do read the documents carefully and check out the fund manager and the fund performance before investing. Analyse the performance in the last 3 or 5 years before you put your money on the line.
