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What are the expected or calculated returns on investing in mutual funds in India?

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What are the expected or calculated returns on investing in mutual funds in India?

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Ever since I started receiving my salary in the last couple of months, my google search history has only been one of the following:

“Top rated restaurants in Bangalore”
“Top rated travel destinations in India”

“Top rated mutual funds in India”

It’s highly tempting for me to blow off my salary in the best leisures I’ve been dreaming of. But with time, I’ve realised that responsibilities and monthly expenses need to be my priority. My dreams didn’t die out though, I still want to go to that fancy restaurant and want to take that trip with my friends, I’ve just changed my approach towards leisure. I’ve begun saving and investing for these experiences, I’ve invested mutual funds in India and expect to get good returns on them. 

Let’s answer this first - “What is a mutual fund?

Before we proceed, let's quickly refresh on the basics. Mutual funds are investment schemes professionally managed by asset management companies (AMC) that serve the needs of individual investors. The AMC makes investments by pooling funds from many investors and investing them in equity shares, bonds, money market instruments, and other types of securities. Investors, in turn, are assigned a specific number of units proportional to the amount they invest in the fund. These are called unit holders. According to his investment in the fund, each unit holder shares gains, losses, income, and expenses of the fund.

Is Mutual Fund the safest investment? 

No investment is 100% risk-free. Even mutual funds. While other investment options like stock markets and real estate are complex and riskier, mutual funds pose a relatively safer option. Also, mutual funds are highly regulated by SEBI, so the chances of your money being scammed or misused are relatively low.

Also, many mutual funds are invested to achieve long-term goals, so you need not worry about the short-term fluctuations in the market. It’s preferable to choose a mutual fund that is in sync with your goals and spread over a long time. Most importantly, don’t forget to do your due diligence about the funds before investing.

Why should you invest in mutual funds?

  • Investing and monitoring is easy.

Investing in mutual funds has become a piece of cake thanks to the internet. Mutual funds can be purchased, managed, and sold online. You also get statements and performances of your fund every month. By keeping track of the performance of the mutual funds online, you can gauge whether your funds are growing according to your goal.

  • Managing professionally

A fund manager has a team of professionals who scrutinise companies and sectors meticulously before deciding whether to buy or sell a stock or securities of a particular company. Teams and resources are aligned depending on the type of fund. For example, index funds require less monitoring and hence may not need as many resources compared to equity funds.

  • Low-Cost

Mutual funds have many investors, so the asset management cost is lower than if it was a single investor's money. In this way, the costs are shared among the investors, making it more attractive to invest in mutual funds.

  • Low lock-in period

Like PPFs, fixed deposits, etc, most traditional investments have long lock-in periods. The lock-in period for mutual funds, however, is generally shorter. Tax-saving mutual funds like ELSS have only a three-year lock-in period, which is lower than other instruments like ULIPs. According to industry experts, you should invest your money in mutual funds according to your short-term or long-term objectives. However, the longer you invest, the better the returns you generally tend to receive. It is easy to redeem your investment in mutual funds according to your needs.

  • Diversification of the portfolio

By investing in mutual funds, you can diversify your investment. It is possible to average the performance of a single stock in the mutual fund with those of other stocks. As a result, you can spread your investment risk and increase your return. For example, if your mutual fund has exposure to stocks, gold and treasury bills, then if the stock value goes down, the loss will be minimal since the value of gold and treasury bills will help even it out.

  • Liquidity and Tax Benefits

There's a variety of ways to save taxes using mutual funds out there, but they all come with fine prints you need to know before investing. Lock-in periods are usually not required for mutual funds other than ELSS or tax-saving funds. In most mutual funds, you can withdraw your investment according to your needs and requirements, and you can invest in mutual funds as and when necessary according to your investment objectives. With money market mutual funds, you can invest for a very high level of liquidity and withdraw the money within a single day. ELSS mutual funds also offer tax benefits up to INR 1,50,000 in a financial year under section 80C of the Income Tax Act, 1961. These funds, however, require investors to lock in their investments for three years.

  • Investing in Goal-Oriented Funds

Different types of mutual funds are categorised based on their financial goals. Investors can choose a mutual fund based on their preferences. The purpose of a growth fund is to provide high returns for investors willing to invest for an extended period. Investors seeking stable income should look at income funds. 

  • High potential for return

Investing for high returns is what we all seek. Mutual funds are one such market-linked instruments that have outperformed the market expectations on several occasions. Equity mutual funds have outperformed bank deposits with returns as high as 11% to 18% over the last decade. Investing in equity stock through mutual funds is relatively safe since you can diversify your risks and enjoy healthy returns.

  • Transparency and Regulation

Securities Exchange Board of India (SEBI) regulates mutual fund houses. The law requires mutual fund houses to make necessary disclosures. A daily update of the mutual fund's NAV (Net Asset Value) is available online. They’re also required to disclose the risk level of the fund. Due to this transparency, it is easier for the investor to track the progress of the mutual fund and gauge its performance.

Do we get profit according to the investment proportion?

Each investor receives the profit or loss according to their invested portion. The managers use the invested amount to invest in various assets and generate returns as per the investment objective. After all, the main purpose of investing is to get returns and additional income.

It is up to you to choose between short and long-term investments. For this purpose, you can select the top-rated mutual funds in India or look into the 5 best performing mutual funds as per to maximise returns. For instance, you might invest in the equity mutual fund stock if you’re interested in long-term investments. All mutual fund types do not offer us the same quality results as you think. For example, debt funds work differently and offer us different benefits in terms of regular income and government securities to earn more profits. In short, investors can get a profit based on ongoing interest rate movements.

How can we calculate the return of investments in the mutual fund?

From time to time, many new schemes are launched to gain the most profit. But, we can estimate the actual investment return by engaging in the selective mutual fund categories. If you’re unsure about getting the exact calculation for the investment purpose, take the help of online calculators available online. These calculators help in giving an idea of how much returns you can expect after you input certain details like the type of fund, the amount you are willing to invest, interest, whether it’s an SIP or lumpsum etc. You can check out the Fi Mutual Fund calculator here for clarity.

Let’s take a glance at how to use the mutual fund calculator

Before you invest, you’d want to know the returns on your Mutual Funds. A mutual fund calculator is a practical financial tool that enables an investor to calculate the returns yielded by investing in mutual funds.

Operating the mutual fund calculator is easy and we get a fair idea of the value we will receive depending on our goal, investment amount and time period of investing. Since we already have an idea of how much we want to invest, we can take the help of calculators to see how much our investment value is worth in the future.

Depending upon the investment nature, we should use the mutual fund calculator.

Understanding the two types of investment.

Lump-sum investment is a one-time investment to get the maximum possible outcome.

SIP investment - Investing smaller amounts at regular intervals, which can be monthly, quarterly or half-yearly.

How can we invest in mutual funds? 

Mutual funds consist of different plans. So, we should choose the method according to our feasibility. Let us talk about the below-mentioned subject briefly.

  1. Direct plans: For those who wish to directly invest in mutual funds. There is no agent or distributor involved. As a result, the expense ratio in this is comparatively lower.
  1. MF distributors: These refer to the AMC and other agents and professionals. It would be quite different from direct programs as we are bound to invest some money to make distributors' commissions.
  1. Online: This can be considered as a hybrid of the above two. As an investor, you can either invest directly online or go through an AMC or third-party platform online to invest. 

The types of returns in mutual fund investments:

Absolute returns: In this case, the growth achieved from the funds will be fixed, irrespective of the tenure of the investment. These are normally used while calculating the returns for less than a year.

Annualised return: As the name says, it is returns received by investors annually. Also known as CAGR (Compounded Annual Growth Rate), this type is advantageous when comparing funds with different tenures. Mathematically put, the formula is

CAGR = {[(Current NAV value/Purchase NAV value)^(1/number of years)]-1}*100

Total return: This takes into account the overall returns, including dividend, interest and overall gain. It is possible that two companies, X and Y, deliver the same growth in a year. However, X has additionally paid out dividends which shows that X is in a better position than Y in terms of performance. Use this method if you want to compare the bigger picture of the mutual fund and not just the price change.

Point-to-point return: Annualized returns are recorded between two points, is known as point-to-point returns. You must consider the mutual fund scheme's starting and closing dates to calculate this value.

 

Rolling returns: In general, it is a monthly, weekly or daily calculation of returns. It effectively measures the returns since it is not biased to a particular period of time and uses the CAGR formula to calculate the returns.

Conclusion

Mutual funds are considered to be a safer option to invest among novice and experienced investors since they have the advantage of being diversified. if you're still confused, look into what's better for you between mutual funds and stocks, There are several types of mutual funds to choose from, and because of this huge variety, there is no single best mutual fund which gives the best return. Each fund is unique based on various factors like the underlying assets and investment objectives they serve. So, it is advisable that you do your due diligence before finalising. With Fi, there is an array of funds available for each type of investor and choosing the funds to invest in is easy since all the information you need is explained to you in simplified, jargon free communication! 

FAQ

Q1. What is the average rate of return of the mutual fund in India?

The average return rate depends on the type of mutual fund you want to invest in. Since there are different types of mutual funds, they all give different returns depending on the assets they invest in and the objective. Index funds, for example, give returns very similar to indices like Sensex and NIFTY, and equity funds give higher returns than index funds but are riskier.

Q2. Which mutual funds give the highest return in India?

It usually is better to consider mutual funds based on your risk tolerance and objectives. Still, generally speaking , equity mutual funds give one of the highest returns due to their aggressive nature and inflation-beating capacity. But they’re also the riskiest and involve investing for a long period of time. 

Q3. Which is the safest mutual fund?

Another way of considering the safest mutual fund is the ones that are the lowest in terms of risk. When it comes to choosing the safest fund, opt for funds with investment in government bonds, municipal bonds, and short-term investments.

Q4. Which is the number one mutual fund in India?

There is no such thing as a number one mutual fund in India as there are so many types and kinds of mutual funds available for all types of investors. The best mutual fund for you depends on your specific needs.

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