Mutual funds clearly stand out as one of the better solutions when it comes to investing for long-term wealth creation. Mutual fund assets under management (AUM) have risen to an all-time high of 48 trillion, demonstrating the general public’s faith in this type of investing. There are many mutual fund categories and subcategories, so it can be difficult to choose the best selection. We will examine the top five mutual fund categories for long-term growth in this article.
Large and mid-cap equity mutual funds
This class of mutual funds offers modest risk along with steady growth. It makes investments in well-established, large-cap firms that are classified between one and one hundredth of the best listed companies. It also comprises mid-sized businesses with potential for growth and ranks among listed corporations ranging from 101 to 250. Sebi regulations state that for this category, a minimum of 35% of the total investment should be made in large-cap and mid-cap stocks.
These funds are appropriate for investors with long-term goals like home ownership or children’s education since they have an investing horizon of five years or more and a moderate ability to take risks. The category benchmark has returned about 18% over the last five years, while the best-performing funds have produced returns of between 19% and 20%.
Mid-cap mutual funds
Because this category concentrates on stocks of mid-sized corporations ranked between 101 and 250th among listed companies, investing in it carries a somewhat higher risk. With a high tolerance for risk, the investment horizon is longer than seven years.
Economic downturns may have a substantial impact on these companies’ growth, so investors must exercise patience and stick with their investments over time. The category benchmark has produced returns of about 22% over the last five years, while the best-performing funds have produced returns of between 22% and 24%.
Flexi-cap mutual funds
Flexi-cap funds are dynamic equity schemes since they must invest in large-, mid-, and small-cap equities, covering all market capitalization. Any listed business, regardless of market capitalization, may be invested in by the fund, with the investment structure specified in the key information document. Because of this flexibility, the fund manager can adjust the portfolio in response to changes in the market, which lowers volatility and mitigates risk.
Investors with a longer investment horizon than seven years who are somewhat risk averse should consider it. The category benchmark for the last five years has produced returns of about 16%, but the best-performing funds have delivered returns of 20% to 25%.
Balanced advantage funds
These mutual funds, which are part of the dynamic asset allocation category, make investments in both debt and stocks. The goal of the allocation between these two asset classes is to maximise returns while minimising risk, and it varies depending on the state of the market. This category allows the fund management to modify the investment levels in both asset classes in accordance with various market cycles since it offers a combination of debt for stability and equity for growth.
The benchmark for this category has produced around a 16% return over the last five years, with the top-performing fund getting about a 17% return. It is appropriate for investors with a moderate risk tolerance and an investment horizon of more than five years.
Equity-linked saving schemes (ELSS)
Like flexi-ap funds, these funds invest in equities of all market capitalization, but they also have the added advantage of being certified under section 80C for tax savings. Investors in ELSS benefit from growth as well as tax savings.
ELSS is a better option for tax-saving investments than other choices with lock-in periods longer than five years because it has the shortest lock-in time, three years. The category benchmark has returned about 16% over the last five years, although the best-performing funds have produced returns closer to 17% to 23%.
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