Mutual funds have emerged as a great value proposition for discerning investors in India, and for good reason!

They offer easy access, liquidity, diversification, and a professionally managed, structured approach to wealth creation. They generally also balance risk and return, making them a great entry point into capital markets for first-time and seasoned investors alike.

The real challenge with mutual funds, however, lies not in investing in them, but choosing the right funds. And that’s precisely what we’re here to help you with. Read on.

How to choose the right mutual funds: A strategic checklist

Selecting the right mutual funds isn’t just limited to chasing ones with the highest returns. It’s about aligning your capital with your purposes and your risk tolerance, amongst other factors.

Here’s a checklist of the factors to look out for while choosing mutual funds, to help you make informed decisions.

Identify your financial goals

Are you looking to fulfil short-term goals such as a vacation abroad or buying a vehicle? Or are you working towards long-term ambitions such as purchasing a house, building an education fund for your children, or saving for retirement?

Your goals help determine the right funds for you, as well as your investment horizon, both of which play a key role in your portfolio.

Assess your risk tolerance

Risk tolerance varies from investor to investor. The term refers to how much loss an investor is prepared to withstand on their investments, given the volatile nature of capital markets.

Broadly, investor risk profiles fall into five categories:

Risk averse

These investors prefer not to take any risks and instead, safeguard their capital by growing it at prevalent deposit interest rates. These may or may not match the rate of inflation.

Conservative

Conservative investors generally aim to achieve investment returns higher than current deposit rates, even if they may otherwise be low. They generally accept small amounts of investment risks, to achieve their objectives.

Moderate

These investors generally look to balance capital growth with income generation through a balanced distribution of their capital between the two. While return potential is higher, the risk of capital loss is also higher.

Moderately aggressive

Moderately aggressive investors aim for higher potential capital returns and are willing to accept higher levels of loss/volatility as well. Capital protection is not a major concern for them, when compared to long term capital growth.

Aggressive

These investors aim to exponentially grow the value of their investments over the long term and are ready to accept high levels volatility and risk to capital preservation in pursuit of the same. They are typically prepared to accommodate significant capital losses over their investment horizon, in pursuit of long-term financial goals and objectives.

Review fund performance

Fund performance is yet another crucial factor that helps one decide whether to invest in it. A mutual fund’s performance should be judged in reference to its benchmark and performance when compared with other mutual funds in the same category.

While past performance is not an indicator of future results, it offers meaningful insights into a fund’s consistency and the fund manager’s strategy. This helps gauge how resilient the fund has been during market downturns and the returns it has offered investors during market rallies.

Factor in the costs: Expense ratios and exit loads

Investing in mutual funds doesn’t come without its own costs. And these costs, while seemingly small on the face of it, can have a substantial impact on your long-term returns. There are two such costs: Expense ratios and exit loads.

Expense ratios

This refers to the fee charged by fund managers for managing your investment. A lower expense ratio is generally favourable for investors.

Exit loads

Certain funds levy a fee if you if you dissolve your investment in the fund, within a certain period. Factoring in these costs is crucial for optimising one’s net returns, especially in cases where one’s investment is a sizeable amount.

Consider your liquidity needs

Liquidity refers to how easily you can access the capital invested in your mutual funds at any given point.  Liquidity is influenced by several factors, including lock-in periods, fund size, and redemption limits. It is yet another crucial factor while choosing mutual funds, especially if you face any unforeseen expenses such as accidents or illnesses, or home repairs and renovations.

Mutual funds for beginners: Types of funds to invest in for a diversified portfolio

An understanding of the different kinds of mutual funds is crucial to design an investment strategy that balances growth and risk management. Here’s a closer look at the mutual fund categories you can consider:

Equity mutual funds

Equity mutual funds primarily invest in shares of publicly listed companies, generating returns in the form of both capital appreciation (through increases in stock price) and a regular income through dividends.

Equity funds typically offer higher returns when compared to other fund types. However, they also have a higher level of risk associated with them, owing to the volatility of equity markets. They are best suited to investors with a longer investment horizon, and a higher risk appetite. Based on market capitalisation, equity mutual funds are further classified into different categories.

Large-cap funds

These mutual funds invest in well-established, financially sound companies with a large presence.

Mid-cap funds

They target mid-sized firms with high growth potential.

Small-cap funds

These focus on smaller, emerging businesses, which offer a significant upside, but also with greater risk.

Debt mutual funds

Debt funds invest in fixed-income instruments such as government and corporate bonds, treasury bills, and money market securities. They offer relatively stable returns and are generally less volatile than equity funds. This makes them ideal for investors seeking a predictable income with a generally stable portfolio.

Index mutual funds

Index funds replicate the performance of a market index, such as the Nifty 50 or Sensex. They invest in the same proportions in the same securities as the underlying index.

Being passively managed in nature, index funds typically offer lower expense ratios. This makes them a cost-effective option for investors. However, bearing in mind that they mirror entire indexes, they don’t allow you to capitalise on specific opportunities. And like equity funds, they can be impacted by broader market downturns.

Hybrid mutual funds

Hybrid mutual funds invest in several asset classes, combining both debt and equity. This could mean both capital appreciation in the long term, as well as a stable income. Hybrid mutual funds have a moderate amount of risk associated with them.

The benefits of diversification: Why you should choose and invest in multiple mutual funds

Relying on a single mutual fund or a single type of mutual fund, exposes your portfolio to greater, more concentrated risks. It is important to spread your risk and diversify your mutual fund portfolio too, so that the underperformance of one segment can be offset by gains in others.

In addition to your portfolio remaining protected against volatility, diversification also enables one to leverage different fund management styles, tapping into different strategies and levels of expertise, thereby enhancing the growth potential of your investments over time.

It is therefore always prudent to invest in a mix of different mutual funds – both at an individual level, as well as a category level. And if you’re wondering just how to do so, SC Invest could be the answer.

SC Invest: A tool to invest on your terms

SC Invest offers you an effortless way to invest in mutual funds — anytime, and anywhere.

Choose from over 300 mutual funds mapped to varying risk profiles from over 23 fund houses, monitor all your mutual fund holdings and their performance through a single dashboard. With SC Invest you can stay updated with market outlook reports and sector analyses from experts and plan your investments with easy-to-use systematic investment plan calculators.

If you’re looking to build a portfolio that offers steady returns and growth at the same time, SC Invest makes the process simple, intuitive, and easily accessible.

Choosing the right mutual funds based on the aforementioned factors is only the first step in building a successful and resilient investment portfolio.

Beyond selection, however, regular portfolio reviews and rebalancing are critical to ensure sustained growth. This is because both market conditions and one’s personal goals can and almost certainly will evolve, and a periodic reassessment of your investments to check if they align with the same ensures that your portfolio remains well-positioned.

Mutual fund FAQs for beginners

1. Who can invest in mutual funds in India?

Any resident of India with a valid PAN card and an Indian bank account who completes their KYC (Know Your Customer) verification can start investing. NRIs can also invest in mutual funds in India, subject to FEMA rules.

2. What’s the minimum amount I need to begin investing?

You can start investing with as little as Rs 100 to Rs 500 via SIPs, depending on a given mutual fund’s minimum requirements. This helps encourage participation from young investors, and helps inculcate a habit of saving in them, from early on.

FAQs for investing in mutual funds with Standard Chartered Bank

1. How to start investing in mutual funds through Standard Chartered Bank?

To begin investing with Standard Chartered Bank, you first need to have a savings account with us. Once that’s done, you will be eligible to open an investment account with us.

2. How to open an investment account with Standard Chartered Bank?

To open an investment account with Standard Chartered Bank, log on to SC Internet Banking. Follow the on-screen instructions to set up your investment profile. Once done, you will see the option to invest in mutual funds tailored to your risk profile.

3. Do I need to pay any charges or fees to start investing in mutual funds through Standard Chartered Bank?

No fees are levied for mutual fund investments through Standard Chartered Bank. Bear in mind, however, this excludes expense ratios and exit loads on mutual funds, which are charged by the AMCs.