How to Make Money In Mutual Funds?

Mahaveer Sanglikar

You can make huge money by investing in mutual funds. This article shares the basics of investing and trading in mutual funds.

First of all, you need to know ‘What is a mutual fund?’ How it works? How much you can make? How much time it will take to grow and give big returns? Here are the answers:
What is a Mutual Fund? How does it work?

What is a Mutual Fund?

A mutual fund is a fund collected from many investors by an asset management fund company, and then invested mainly in the equity market, bonds, and other securities. Mutual funds make money mainly through the dividends from shares, interest received from the bonds, and profit booking on the shares.

The company allots units of the fund to each investor. Each unit has a net asset value (NAV). As the profit on the capital invested grows, the net asset value also grows. Investors can sell the units anytime to book profit. Or they can wait for a long period to book huge profits. Generally, a long-term investment in a mutual fund gives very high returns.

Types of Mutual Funds

There are many types of mutual funds, based on their investing. Here I am describing some of the mutual fund types, which small investors may find interesting.

Stock Market Growth Funds
These funds principally invest in the shares of various companies. Again, these funds can be categorized into Large Cap Funds, Mid Cap Funds, Small Cap Funds, and Flexi Cap Funds.

Large Cap Funds are invested in the stocks of the companies which have a large market capitalization. These funds have lesser growth, and so your returns are also lesser (but much better than your bank deposit interest rates).

Large Cap funds are less risky when compared to small cap and mid cap funds.

Mid Cap Funds are invested in the stocks of companies that have medium market capitalization, and Small Cap Funds are invested in the stocks of companies that have small market capitalization.

Flexi Cap funds are invested in stocks of all sizes.

Index Funds
Index Funds are invested in stock market indices, which means the money is invested in the stocks of that specific index. For example, A Nifty Fifty Index Fund is a fund that is invested in the stocks related to Nifty Fifty stock. As there are many indices, there are many index funds, like Large Cap Index Funds, Mid Cap Index Funds, Small Cap Index Funds, etc.

Exchange Traded Funds (ETF)
As the name suggests, these funds are traded on exchanges, unlike the other funds. You can buy and sell them directly on a trader terminal.

There are many other types of mutual funds based on the type of investment they do, like Money Market Funds, debt funds, Global Funds, and Sector Funds (like Pharma, Infrastructure, Bank, Finance, IT, Gold, Silver etc).

How Much Money You Can Make in Mutual Funds?

So how much money you can make in mutual funds? Well, the answer is: It depends on the type of mutual fund you invest in, the amount you invest, and the period of your investment. Investing in small-cap funds gives higher returns while investing in large-cap funds gives lesser returns. However, although large-cap funds give lower returns, the returns are much higher than that of bank fixed deposits.

Investing for a long period gives you very high returns, because of the high growth of the value of the stocks the funds have invested in.

Is Investing in Mutual Funds Risky?

There are many mutual fund companies in India and the world over, and each mutual fund company manages various types of funds. The fund managers are very professional and have expertise in investing. So generally investing in mutual funds (especially that of reputed mutual fund companies, which have a better track record) is not risky.

However, the mutual fund companies give warning to the investors that Investing in the Mutual funds is risky. This warning is given because of the possible market volatility, and unavoidable situations like market crash, recession, pandemic, global situation, etc.

If you invest in a non-performing or wrong mutual fund, it will become a risky investment. Similarly, if you invest blindly, without any study, or you invest a lump sum amount at the wrong time, i.e. when the unit price is very high, it will become a risky investment.

Liquidity of Mutual Funds

Most types of mutual funds have good liquidity. You can put a withdrawal order for your investment or part of that anytime, through the app provided by the mutual fund company, or through the company’s website. You receive the money in your linked bank account within 4 working days.

But in the case of a few exchange-traded funds, sometimes there are no buyers, and you will not be able to sell quickly.

How to Invest in Mutual Funds?

Investing in mutual funds is a very easy thing. You can start to invest through a broker, or you can directly invest through your online trading platform or the app provided by the mutual fund company. If you are going to invest through a broker or the app, you need to provide some documents and information like your PAN, Identity Proof, Bank Details, etc.

There are two popular methods of investing in mutual funds. The first is a Systematic Investment Plan (Popularly known as SIP), and the second is a Lump sum investment.

In a Systematic Investment Plan, you can invest a specific predetermined amount on a specific date of each month. For example, you can invest INR 1000 on the 15th of every month. The amount is automatically deducted from your linked bank account. A specific number of units are deposited in your mutual fund account after the deduction of the amount. The number of units varies according to the NAV of the units.

In Lump sum investment, you can invest a bigger amount anytime. For example, if you invest INR 10000 at once, it is called a lump sum investment.

Top Performing Mutual Funds in India

There are many mutual fund companies in India, and each has many mutual fund schemes. Here I would like to mention the Top 5 Funds in each category, which have a good track record and higher returns on the investment:

Small Cap Funds
Nippon India Small Cap Fund
Quant Small Cap Fund
HDFC Small Cap Fund
HSBC Small Cap Fund
Canara Robeco Small Cap Fund

Mid Cap Funds
Quant Mid Cap Fund
Motilal Oswal Mid Cap Fund
SBI Magnum Mid Cap Fund
HDFC Mid Cap Opportunities Fund
PGIM India Mid Cap Fund

Large Cap Funds
ICICI Prudential BHARAT22 ETF
ICICI Prudential BHARAT22 FOF
Nippon India Large Cap Fund
Quant Focused Fund
Canara Robeco Bluechip Equity Fund

Flexi Cap Funds
Quant Flexi Cap Fund
360 ONE Focused Equity Fund
Parag Parekh Flexi Cap Fund
HDFC Retirement Savings Fund Equity
HDF Flexi Cap Fund