Identifying best schemes in mutual funds remains a very challenging exercise given there are more than 40 mutual fund houses in India with more than 10 different fund categories. The most important aspects in selection of mutual schemes which many distributors/financial advisors overlook are the risk profile and time horizon of investors.
For naïve or first-time investors, it might be good to start putting money in Index funds. They are relatively safe as they reflect index (like Nifty, Sensex) returns. Index funds are also gaining popularity as they have relatively lower expense ratio and have recently been outperforming large cap, actively managed funds. This trend is likely to continue as our markets get more mature and developed. In nearly all western world markets, Index funds generally always perform the best. Hence, it is advisable to put money in Index funds, especially for first time or conservative investors.
In recent time, we have seen a big divergence in large and mid/small cap space with large caps outperforming in big way. Additionally, broad indices are at all-time highs where the chances of broadening of market breadth increases and that is the reason, we expect mid and small caps to do relatively well in 2020. For investors who can take additional risk and have some time in hand, should invest in Small Cap and Mid Cap funds along with Index funds.
In addition to mid/small cap category, investors with high risk appetite and longer term can also invest in Sectoral funds. There is always a possibility one sector outperforms the overall market/index and provide stupendous returns to the portfolio. One can expect such relative out performance from Banking and Infrastructure themes as market breadth is expected to broaden in 2020. Banking is a high beta sector and can generate unexpectedly higher returns in a bull market. Infrastructure stocks have been out of focus and are generally underowned and undervalued. With economic growth likely to return in 2020, quality stocks in the infrastructure space are set to generate stupendous returns.
The systematic investments in the above themes/categories can help investors diversify their portfolios and can achieve handsome returns in 2020.
For investors with a short term investment horizon, Liquid funds are a good idea as they are very safe and liquid. Returns on these schemes are low but if the investor is willing to take some chances, then liquid schemes can be combined with equity index funds. Index funds are relatively less volatile and their addition into the portfolio can help achieve a return higher than fixed deposits and other fixed return instruments with additional advantage of instant liquidity. Besides liquid funds, the other categories of debt funds like FMPs, Income funds are very risky as corporate defaults are rising. Their returns are certainly not commensurate with the risks. Gilt funds do not carry any credit risk but are extremely sensitive to interest rate movements. Any small rise in interest rates can result in a disproportianate fall in the NAV of Gilt Funds.
Gold as an asset class has done very well in the current year. Given the global economic uncertainly gold is likely to continue with its glitter. Gold ETFs are an ideal way to invest in the yellow metal as it saves us from the hassle of physically holding gold.
To conclude, one can safely say that depending upon each individual’s profile and holding period there are various options available in mutual funds. They continue to remain the preferred investment vehicle for seasoned investors.