Which MF you should invest in depends on your investment objectives. Here are the most common objectives that investors have when they invest in Mutual funds:
• Growth objective – “I want to invest Rs 10,000 today and after five years take back Rs 25,000 and I want this to be tax free” – this is an example of the kind of growth objectives that investors have. The funds that try to meet these objectives invest in equities – hence they are called Equity funds. Here is an example of a mutual fund . This is HDFC top 200 fund – it invests in some of the largest companies in India. The fund manages more than Rs. 10,000 crore of funds ( called Assets Under Management -AUM) – the investments the fund has made is given here . Funds like these give a sensex return plus 5% – so if sensex has given, let’s say 15% in the past 12 months, – this fund is likely to have given 20% in the same period.
• Income objective – “I am retiring next year and would get a gratuity of Rs50 lacs – I want to invest it such that my gratuity is preserved and I get a monthly income better than a post office deposit interest” – this is an example of the kind of income objectives that investors have. Investors look at preservation of capital and a fixed income over the medium to long term. The funds that try to meet these objectives typically invest in debt instruments issued by government, banks, corporate and financial institutions – hence they are called Fixed income funds or debt funds. Here is an example of a debt fund . This fund is managing more than 10,000 crores of investor money and it has currently invested this amount in the securities listed here . Such funds are best suited for retirees where safety of capital is more important than returns.
• A combination of growth and fixed income – “I have received my annual bonus of Rs 10 lacs just now – I want to invest it such that in 5 years it becomes 15-18 lacs plus I get a payoff of Rs. 60,000 per annum for my vacation out of this fund” – this is an example of the kind of growth and fixed income objectives that investors can have. Investors look at both capital appreciation and fixed income over a long term. The funds that try to meet these objectives typically invest in both equities and debt instruments – these funds are called Balanced funds. The HDFC Prudence fund is a very good balanced fund. The HDFC Prudence fund fund manages more than Rs 25,000 crores of investor money and has appx 70% of it invested in equities and remaining in debts – the details od it’s investments can be seen here. This fund is perfect for someone who wants to have low risk and reasonable returns.
• Short term investments – “I have Rs 100,000 with me for the next three months – it is meant for my child’s school admission due three months from now and I need to park it somewhere till then – I would like to have a better return than a savings bank account” – this is an example of the kind of short term investment objective that investors can have. Investors look at parking their funds temporarily (from few days to 12 months) look for high liquidity and interest earnings for the period. The funds that try to meet these objectives typically invest in short term debt instruments like interbank money markets – hence these are called Money market funds. Here is an example of a good fund that invests in liquid money markets . Some smart investors park their funds in these funds instead of a savings back account.
• Tax saving schemes – “I want to reduce my tax out go and is there some place I can invest beyond PPF and Post office schemes?” – this is an example of the kind of tax saving objective that investors can have. The funds that offer tax rebates are called Equity linked saving schemes (ELSS). Here is an example of an ELSS fund You need to invest in such funds for a period of three years to gain tax rebate under sec 80C. More details on how to save taxes under section 80C are given here.