Best Mutual Funds for Beginners

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If you are an amateur in the area of financial investment, Congratulations, you have finally landed in the right place.

This article will talk about what mutual funds are, why you should invest in them, what points you should consider before investing and which one you can invest in.

What are Mutual funds

Any professionally managed fund that pools in money from investors to purchase securities is termed as a mutual fund.

• The money invested is used to purchase company shares, stocks, or bonds and is shared by thousands of investors
• These funds are taken care of by professional fund managers that work on these investments with the idea of generating the highest possible returns
• All the important decisions regarding the rules and regulations of mutual funds are made by SEBI (Securities and Exchange Board of India)
• Investing in a mutual fund is a safe and hassle-free process, and is considered one of the easiest ways to gather wealth

Related Article: Best Investment Plans

Types of Mutual Funds

• • Equity funds– Equity funds predominantly invest in the equity shares of different companies. Equity funds are considered suitable for investors who are looking towards long term capital appreciation and are comfortable in dealing with moderate to a high level of risk
  • Debt funds– Debt funds primarily invest in fixed income government securities such as treasury bills and bonds, or corporate deposits. Debt funds involve lesser risk than equity funds, and as a result, also offer lesser returns. These funds are considered suitable for risk-averse investors with a short term investment horizon
  • Hybrid funds- Hybrid funds invest in a mix of equity shares and debt securities, with the idea of maintaining a balance between the risk involved and the returns generated. It is in the hands of the fund manager to settle on a ratio of investment in equity and debt so as to reap the best of both

Guide to Investing in Mutual Funds

Mutual fund investments are not as complicated as they may seem. The process involved is rather simple and hassle-free. All you need is to take care of the following-

• Before you start investing, understand your purpose of investing; whether you are investing in the long term and whether you can afford any risk with your corpus, etc. These aspects will help you a long way in choosing the type of fund that you may invest in
• You do not need to have a huge sum of money to start investing. You can begin your investment journey with as low as 500 bucks
• Keep your investment portfolio (a portfolio is a collection of mutual funds that help you meet your investment goals) diversified such that if one type of fund fails to perform well, the other may balance your returns generated
• It is advised that you invest through SIP (Systematic Investment Plan), which allows you to pool in a fixed amount of money at regular intervals (of your choice); unlike lump sum mode of investing, wherein you have to pool in the entire amount in one go
• Before you start investing, understand how mutual funds can help you save on taxes. Various types of mutual funds have varied taxation policies. For instance, investments made in ELSS (Equity Linked Saving Schemes- a type of equity investment) allow a tax deduction of up to INR1.5Lakh under Section 80C of the Income Tax Act
• KYC or Know Your Customer is a regulation implemented by the government to enable financial transactions in the country in order to ensure the safety of the transaction. Keep your KYC documents updated before you start investing.

Related Article: Mutual Funds as explained by Paisabazaar

Best Mutual Funds for Beginners

Fund Name	Fund Category	AUM  (in Crore)	1Y Return (in %)	3Y Return (in %)	5Y Return (in %)
Axis Long Term Equity Fund	ELSS	19,632	-4.96	4.42	6.78
Mirae Asset Large Cap Fund	Equity, Large-Cap	15,347	-15.16	0.72	6.45
SBI Bluechip Fund	Equity, Large-Cap	19,785	-15.18	-1.91	3.96
Axis Focused 25 Fund	Equity, Multi-Cap	9,493	-6.23	3.51	8.75
SBI Focused Equity Fund	Equity, Multi-Cap	7,968	-8.80	5.13	8.17

Data as on 15 May 2020; Source: Value Research

1. Axis Long Term Equity Fund

Fund	AUM (in Crore)	1-Year Return (in %)	3-Year Return (in %)	5-Year Return (in %)
Axis Long Term Equity Fund	19,632	-4.96	4.42	6.78
S&P BSE 500 TRI	–	-17.04	-1.87	3.39

Data as on 15 May 2020; Source: Value Research

• Out of 95.82% investment in Indian stocks, the fund has 75.30% in large cap stocks, 19.59% in mid cap and the remaining 5.11% in small cap stocks
• Being an ELSS, the fund asks for a lock-in period of 3 years; implying that the investor’s investment horizon should be around 4-5 years in order to beat the inflation rate
• The fund involves lesser risk and provides tax exemption of capital gains of up to 1.5 Lakh in a financial year

2. Mirae Asset Large Cap Fund

Fund	AUM (in Crore)	1-Year Return (in %)	3-Year Return (in %)	5-Year Return (in %)
Mirae Asset Large Cap Fund	15,347	-15.16	0.72	6.45
S&P BSE 100 TRI	–	-16.89	-0.40	3.50

Data as on 15 May 2020; Source: Value Research

• The fund has invested 83.96% of its total assets in large cap stocks and 14.04% in mid cap stocks
• Under efficient management of the portfolio by the fund managers, the fund has delivered remarkable historical returns over the 5 year and 7 year time periods
• The investors must stay invested in the fund for at least 3 years in order to benefit from the investment made

3. SBI Bluechip Fund

Fund	AUM (in Crore)	1-Year Return (in %)	3-Year Return (in %)	5-Year Return (in %)
SBI Bluechip Fund	19,785	-15.18	-1.91	3.96
S&P BSE 500 TRI	–	-16.89	-0.40	3.50

Data as on 15 May 2020; Source: Value Research

• The fund aims to provide long term growth opportunities to investors by employing active management in a diversified basket of large cap stocks
• The fund has a minimum of 80% assets invested in companies with large capitalization that intend to perform well in the market
• The fund managers strategically use a combination of growth and value style of investing using a top-down and bottom-up approach for the selection of stocks

4. Axis Focused 25 Fund

Fund	AUM (in Crore)	1-Year Return (in %)	3-Year Return (in %)	5-Year Return (in %)
Axis Focused 25 Fund	9,493	-6.23	3.51	8.75
S&P BSE 500 TRI	–	-17.04	-1.87	3.39

Data as on 15 May 2020; Source: Value Research

• Going by its name, the fund invests in equity and equity related instruments of a maximum of 25 companies from the first 200 companies that fall under the SEBI’s list of categorization of large to mid cap
• The fund is suitable for investors with moderate to high risk appetite and an investment horizon of around 3-5 years
• The fund’s major holdings include Bajaj Finserv, Bajaj Finance, HDFC Bank, Avenue Supermarts

5. SBI Focused Equity Fund

Fund	AUM (in Crore)	1-Year Return (in %)	3-Year Return (in %)	5-Year Return (in %)
SBI Focused Equity Fund	7,968	-8.80	5.13	8.17
S&P BSE 500 TRI	–	-17.04	-1.87	3.39

Data as on 15 May 2020; Source: Value Research

• The fund claims to invest a minimum of 65% of its assets in equity and equity related securities
• The fund managers follow a bottom-up approach for the selection of stocks and investment of assets across sectors and companies with varied capitalisation
• The fund aims to appreciate the capital of investors through investments in a concentrated fund portfolio

How to Invest in Mutual Funds

You can invest in mutual funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Canceled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment

Taxation on Mutual Funds

Equity Mutual Funds

If an investor has made a capital gain of ₹50000 on investment in an equity fund, Short Term Capital Gains Tax of 15% would be levied if s/he withdraws the amount within one year of investment. The payable tax would be ₹7500.

Also, if an investor has made a capital gain of ₹1.5 lakh on investment in an equity fund, and withdraws the amount after 1 year of investment, Long Term Capital Gains Tax of 10% would be levied on ₹50000. ₹1Lakh is exempted from taxation. The payable tax would be ₹5000.

Debt Mutual Funds

If an investor has made a capital gain of ₹50000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor and taxed accordingly.

If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.

Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment.

To calculate the final value of capital gains post indexation, we use the government’s Cost Inflation Index (CII) in the following formula:

Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)

Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation

Indexed Cost of Acquisition= 70000* (280/254) = 77165.35

Note: CII in the year 2015 = 254

CII in the year 2018 = 280

Final Value of Capital Gains= 100000- 77165.35 = 22834.65

Tax Payable = 20% of 22834.65 = 4566.93