There Are 2500 Mutual Fund Schemes Out There. Which One’s Right For You?

India’s Mutual Fund industry has been on a roll over the last couple of years. According the to AMFI, the total assets under management (AUM, or more simply, the money that’s being managed) by Mutual Fund companies, hit 58.6 trillion rupees (around $701.90 billion) in May 2024. This marks a jump of 10 trillion rupees in under a year! Clearly, those Mutual Funds Sahi Hai campaigns have worked.

But this surge in investor interest also means that Fund Houses have been cranking out new schemes every month, with 100+ NFOs (New Fund Offering) launching in 2024 alone. Rest assured, there’s plenty of mutual fund fish in the sea.

But how does one choose? Here’s a framework you can use.

Step 1: What are you saving for?

Your savings goal is your starting point. Think of each goal as a bucket that needs to be filled, and the more specific you are with defining this, the better. Is it a lumpsum you’d want in 15 years for your child’s education? Is it a sum you’d want as a downpayment for your dream home in about 10 years? Or is it to help fund your wedding in about 5 years? Define the purpose of the investment and how far away it is in the future.

Step 2: The Farther, The Riskier

Now you have to choose the type of fund you have to invest in. Mutual Funds come in many shapes, forms and volatilities. If your goal is in the short term (the next year or so), you’re better off investing in a safer instrument with a guaranteed rate of return, like an FD. If you’re not a risk taker, then debt centric funds with predictable rates of return might be the right option.

But if your goal is in the medium to long-term future, you can afford to take a riskier bet since the risks iron themselves out in the long term. Take a look at the graphs below. The first one shows SENSEX’s movement (representative of the stock market, broadly) in a month, a year, five years and since its inception in the 80s.

You can see that the dips in the short terms are barely visible in the upwards arrow of the long term. It’s a great visual reminder that while we go through cycles of dips and recessions, the arrow tends to trend up. This of course, is under the assumption that the world – and our country – remains stable. Invest in equity and equity-related instruments only if you’re ready to make this assumption!

Step 3: Pick Your Fighter

Now that you know your goal and how far away it is, you can pick a fund. Here’s a rough guide that can help you zone into the type of fund you can choose based on your goals and risk-taking abilities.

Step 4: Use the internet

Very underrated. Let’s say you know you need to invest in a Flexi Cap fund. Which fund do you choose? Every noteworthy business publication has a very well researched, “top” mutual fund list – in a way they’ve more or less done the work for you. I personally keep track of the Livemint 20 and the MoneyControl 30. These lists have culled down the 2000+ funds out there into handy categories based on what you want to invest in, and have identified the best performers based on returns, how long the fund has been operating, the total money it manages etc.

You could get hold of an investment advisor if your ask is slightly more complex or if you want to invest a larger sum of money, but if you’re just getting started, these lists make your life very easy.

Step 5: Start, slow & steady

If you’re a beginner my advice is to go one fund at a time. SIPs (Systematic Investment Plans), which are small monthly payments are the best way to build a savings habit with mutual funds. You can start with as little as ₹500/month and keep building on top of that.

If you’re looking for a platform, I use coin by Zerodha. There is brokerage, but I do find the platform easy to use & reliable.

Do mutual funds/index funds beat inflation?

A reader had sent in this question, asking if mutual funds – specifically index funds – could beat inflation. The answer is yes. Index funds on average have been returning well over 12% year on year, over the last decade. Inflation has hovered around 5-6%.

So to reiterate: don’t think too much! Getting started is the best way to get started.