Some Guidelines for Mutual Funds

Before you go ahead and invest in the mutual fund that is earning the best returns right now, you should think a little bit about what is the best mutual funds for your specific goals and needs. I have written a longer answer on how to choose a mutual fund to invest in. You can read that here.

But what I will do is also give you a concise answer to your question. The mutual funds that you should invest in to get the best returns are equity mutual funds. Equity mutual funds invest primarily in stocks of companies. It is like investing in the stock market, but with an expert fund manager taking the buy and sell calls for you. Equity funds help you diversify and ride out the stock market volatility, which makes them great investment vehicles for the long-term.

But you shouldn’t blindly invest in equity mutual funds just by their recent good performance. You should choose a fund that has done well over different market cycles. The best mutual funds are not those that have earned spectacular returns in recent times, but those that have earned high returns in bull runs and also managed to contain the fall in bear phases.

That is why you should choose an equity mutual fund with a decent number of years behind it.

A good way of ensuring you end up investing in mutual funds that have performed well over different market cycles is by trusting the advice of an investment expert. An expert can help you pick a portfolio of funds that will match your investment needs. At Upwardly, we have designed different portfolios for investors with different investment goals. You just have to choose the portfolio, we’ll take care of the mutual funds for you.
Check out the Advanced Equity Investing portfolios and pick one that fits you best.

There is no one mutual fund that is best for every investor. What is the best mutual fund for you to invest in depends on the following factors:

Age: Younger investors can generally take higher equity-related risks
Stage of Life: What is the size of your family, whether your spouse is working or not and if you have any dependents
Monthly investible corpus: The more you have to invest, the more you can diversify across mutual funds
Your Financial goal: Equity funds should be avoided for non-negotiable, short-term goals
Investment Horizon: If you’re investing for the short-term, which is around 3 years, you should invest predominantly in debt funds.

You can afford some equity exposure, but it should not be dominant. The longer your investment horizon, the higher exposure to equity funds you can have. For medium-term goals, if prefer to be relatively risk-averse, you can choose to invest in balanced funds.
So, once you have selected the fund type you need to invest in – equity, balanced or debt – you can go ahead and try to find the best mutual fund within that category.

Do note your ability to take risk is fundamentally very different from your desire to take the risk. A good advisor differentiates between the two and creates asset allocation and a basket of funds to invest in according to that.

Mutual funds are ideal for long-term investment. I am assuming when you say ‘long-term’, you mean more than 5 years.

I am sure by now you’re aware – different types of mutual funds offer different returns. As with any investment, high returns mean higher risk.

In terms of risk, small-cap funds are the riskiest while balanced funds are the least risky.

Risk Levels: Small-cap > Mid cap > Multi-cap > Large cap > Balanced Fund

That said, investing for a longer duration allows you to take greater risk. So its good you plan to invest for the long term.

For example, a 45 year wanting to invest for 10 years will invest in relatively less risky funds (like large-cap) but a 25-year-old might want to invest in a riskier fund (like small cap).