Must-have Mutual Funds: What are the 'must-have' mutual fund categories for your portfolio, the secrets no one would tell you!

The must-have categories for your portfolio

Mutual funds have become an integral part of financial savings for Indian households, and they offer a valuable avenue for wealth creation. While some may argue that you can navigate the investment landscape without them, it's essential to recognize that mutual funds are an excellent choice, if not a necessity, for many investors. They provide diversification, professional management, and a range of options tailored to different risk profiles and financial goals. In this blog, we'll delve into the must-have mutual fund categories that can help you build a robust portfolio, saving you the significant costs associated with financial advisors.

Understanding the Classification of Mutual Funds

To make sense of the mutual fund landscape in India, it's essential to grasp the classification set forth by the Securities and Exchange Board of India (SEBI). SEBI classifies mutual funds into five broad categories, each designed to cater to different investment objectives:

1. Equity Schemes: These funds primarily invest in equities or stocks, making them suitable for investors seeking the potential for capital appreciation over the long term. Equity schemes come in various subcategories like Large Cap, Mid Cap, Small Cap, and more.

2. Debt Schemes: Debt Funds focus on fixed-income securities such as bonds, government securities, and money market instruments. These are ideal for those who prioritize stability and regular income in their investments.

3. Hybrid Schemes:Hybrid Funds, as the name suggests, combine elements of both equity and debt. They offer a balanced approach and are often chosen by investors looking for a mix of capital appreciation and income generation.

4. Solution-Oriented Schemes: This category is specifically tailored for long-term financial goals, such as retirement and children's education. However, Solution-Oriented Schemes come with lock-in rules that may not align with the flexibility many investors desire:

   Retirement Fund: These funds have a lock-in period of at least 5 years or until the investor reaches their retirement age, whichever occurs earlier.

   Children's Fund: Similar to retirement funds, these schemes also have a lock-in period of at least 5 years or until the child attains the age of majority, whichever comes first.

5. Other Schemes: This category encompasses Index Funds, Exchange-Traded Funds (ETFs), and Fund of Funds. While Index Funds and ETFs offer a passively managed approach to investing, Fund of Funds invest in other mutual funds.

Eliminating Unnecessary Categories

Having discussed the classifications, it's evident that Solution-Oriented Schemes might not be the right fit for every investor due to their lock-in restrictions. This limitation can deter individuals seeking more flexibility in their investment choices. Therefore, many investors prefer to explore other mutual fund categories that offer greater maneuverability and alignment with their financial goals.

With the elimination of Solution-Oriented Schemes, investors can focus on categories that provide the desired balance between risk and reward, enabling them to build a more versatile and responsive portfolio.

To identify the must-have mutual fund categories, we first need to eliminate the unnecessary ones. Among the various categories classified by SEBI, Solution-Oriented Schemes are often deemed unnecessary due to their lock-in rules. Retirement Funds and Children's Funds, for instance, require a lock-in period of at least 5 years or until retirement age or the child attains the age of majority, making them less flexible.

Exchange-Traded Funds (ETFs) can also be eliminated for most retail investors in favor of index funds, as ETFs come with additional price risk due to the need to buy and sell from other unit holders.

Navigating the Equity Scheme Categories

When it comes to equity scheme categories, there are several options to choose from. However, not all are must-haves for your portfolio. Large Cap Funds, Mid Cap Funds, Small Cap Funds, Large & Mid Cap Funds, Flexi Cap Funds, Multi Cap Funds, dividend Yield Funds, Value Funds, Contra Funds, Focused Funds, and Sectoral/Thematic Funds all come with their own set of risks and may not be necessary for most investors.

As for ELSS (Equity Linked Savings Schemes), they have become redundant with the introduction of the New Tax Regime.

Selecting the Right Hybrid Scheme Categories

In the realm of hybrid schemes, it's crucial to be selective. Conservative Hybrid Funds and Balanced Hybrid Funds may be eliminated as unnecessary, while Aggressive Hybrid Funds and Multi-Asset Allocation Funds can serve as replacements for equity funds, particularly for long-term goals. It's worth noting that, at the time of writing, there are no index funds available in this category.

Understanding Debt Scheme Categories

Debt scheme categories can be equally complex to navigate. It's advisable to avoid Overnight Funds, Ultra Short Duration Funds, Low Duration Funds, Short Duration Funds, Medium Duration Funds, Medium to Long Duration Funds, Long Duration Funds, Dynamic Bond Funds, Credit Risk Funds, Banking and PSU Funds, and Floater Funds, as these come with varying degrees of risk and may not be suitable for most investors.

However, Corporate Bond Funds and Gilt Funds, when managed prudently, can offer less volatile alternatives for fixed-income investors.

The Must-Have Categories

In summary, while there are no "must-have" mutual fund categories, there are categories that can fulfill the needs of most investors. These include:

1. Index Funds

2. Flexicap Funds

3. Aggressive Hybrid Funds

4. Multi-Asset Funds

5. Liquid Funds

6. Money Market Funds

7. Corporate Bond Funds (only in AA+ and above rated corporate bonds)

8. Gilt Funds

These categories provide a well-rounded approach to building a diversified portfolio that aligns with your financial goals and risk tolerance. By carefully selecting from these categories, you can navigate the mutual fund landscape efficiently, reducing the need for a costly financial advisor. Remember that financial literacy and informed decision-making are the keys to successful mutual fund investing.

Note:  The information of this article is sourced from freefincal

Disclaimer: The article is for informational purposes only and not investment advice.