Personal Finance: A Focus on the Mutual Fund Universe for Long-Term Goals

Creating a long-term corpus involves adequate financial planning and choosing ideal investment tools. Mutual funds prove to be the ideal investment vehicle for wealth creation. The assets under management (AUM) of mutual funds have peaked at Rs 48 lakh-crore corpus, highlighting the significant confidence held in this tool. 

With more than 20 categories of mutual funds and various sub-categories, selecting the most perfect option can pose a bit of a challenge. 

Here’s the lowdown on the important categories under the mutual fund universe.

Large and mid-cap equity mutual funds: They are a category of mutual funds that offer sustainable growth driven by moderate risk. It invests in large-cap companies with a strong footing and ranked from 1-100th among the top listed companies. 

In addition, it comprises mid-sized companies with rankings from 101-250th among listed companies, offering significant potential. 

As per the markets regulator, the Securities and Exchange Board of India (SEBI) norms, a minimum of 35% each should be invested in large-cap and mid-cap for this category. 

With an investment horizon of five-plus years and moderate risk-taking ability, these funds are ideal for investors with long-term financial goals, which could be related to buying a home, children’s education, or marriage. 

In the past five years, the benchmark index for this category has generated about an 18% return, while the top-performing funds have yielded returns anywhere between 19% and 20%.

Mid-cap mutual funds: Investing in this particular category involves a bit of a higher risk, as it invests in stocks of mid-sized companies ranked from 101 to 250th among listed companies. The investment horizon is over seven years with a high-risk tolerance. 

The growth of these companies could be considerably influenced during phases of economic downturns, wherein patience remains the key for investors and staying invested with a focus on the long term. In the past five years, the benchmark index for this category has generated about a 22% return, with the top-performing funds delivering returns anywhere between 22% and 24%.

Flexi-cap mutual funds: These are required to be invested across all market caps – large-cap, mid-cap, and small-cap stocks- which makes such funds a dynamic equity scheme.

The fund could invest in any listed company, irrespective of its market capitalisation (m-cap), with the investment structure pre-defined in the key information document. This flexibility gives the fund manager leeway to make portfolio changes as per market dynamics, mitigating risk and reducing volatility in the bargain. 

It is ideal for moderately conservative investors with an investment horizon of over seven years. In the past five years, the benchmark index for this category has generated about a 16% return, while the top-performing funds have provided returns in the range of 20% to 25%.

Balanced advantage funds: These funds are from the dynamic asset allocation category. Such mutual funds invest in both stocks and debt instruments. The allocation between these two asset classes changes based on market conditions, aiming to provide optimal returns with minimum risk. 

This category provides a suitable mixture of equity for growth and debt for stability, allowing the fund manager to adjust the investment levels in both asset classes according to different market cycles.

Suitable for investors with a moderate risk tolerance and an investment horizon of more than five years, the benchmark for this category has generated around a 16% return in the past five years, with the top-performing fund achieving about a 17% return.

Equity-linked savings schemes (ELSS): Such funds invest in stocks across all m-caps, similar to flexi -ap funds, but with the added benefit of certifying the investment under Section 80C of the Income-Tax Act (ITA), 1961, for tax saving purposes.

An investor in ELSS can get dual benefits of tax savings, including growth. ELSS has the least lock-in period of three years, thus making it a preferred choice for tax-saving investments as against other tools with lock-ins of more than five years. 

In the past five years, the benchmark index for this particular category has generated about a 16% return, while the top-performing funds have delivered returns anywhere between 17% and 23%.

Mutual fund categories, ranging from the blend of large- and mid-cap, and mid-cap funds to the flexibility of flexi-cap funds, the strategic adaptability of balanced advantage funds, and the tax efficiency offered by ELSS funds, introduce a gamut of investment opportunities for an investor focused on the wealth generated in the long run. 

Creating an ideal mutual fund portfolio with the potential for market-beating returns and an effective risk-adjusted ratio could be suitably undertaken by diversification. These categories have distinct risk-return profiles, offering substantial choices to align with varying investment objectives. 

In case of any doubt, an investor can always contact a professional financial expert for adequate guidance.