Before investing in any investment option, this question comes to our mind and for Mutual Funds also it is true. So if you are in the research phase of investing in Mutual Funds, you will often ask someone, “Are Mutual Funds profitable?”
Like every other investment option which depends on the market, Mutual Funds are profitable, but it depends on Your Portfolio, that is the selection of funds. You must diversify your portfolio and remain invested for a longer period of time.
If you are new to Mutual Funds Here is a guide Mutual Fund for Beginners.
In the year 2018, investors have seen negative returns for their portfolio. The reason is that their portfolio was not diversified.
For instance, one of my friends who got educated by himself on Mutual funds had the following portfolio
- SBI Small Cap Fund- Growth
- HDFC Small Cap Fund- Growth
- Reliance Small Cap Fund- Growth
Do you see the problem? No diversification.
So, a wise investor will have more diversification. My friend had all small cap funds as his assumption is based on the last five years returns and he felt he will get more than 30% returns.
It is difficult to tell if a fund is performing such nicely in the last five years will also perform well every year.
Also I would like to point out that he wanted quick returns within 2 years.
I had to educate him that he would see slight returns in 3 years looking at his portfolio. Best thing will be to keep the money as it is for at least 5 years to see good returns on the investment.
So Mutual fund investments are profitable.
You must however, consider a few things before investing:-
If you are young and just started earning, you can amass a huge wealth by the age of 45 years and can retire from your job.
If you are in your 40s then you need to invest in safer options so as to make a retirement fund which will be just enough to make ends meet.
Moral: Start early.
Mode of Investment
Lump Sum mode of investment requires investing one time complete amount of money. Aggressive investors invest one time money. When market is growing continuously, it is recommended to invest in the lump sum mode. But when the market is slow, it is not wise to invest lump sum.
Systematic Investment Plan(SIP) mode of investment requires a discipline of investing money every week, month, quarterly. SIP is considered better than lump sum because of Rupee cost averaging. That is the loss is averaged as more units are purchased when their prices are low and less units are purchased when the prices are high. You can use our SIP Calculator for finding out the returns on your investment.
Our SIP Calculator:-
The Type of Mutual Fund
- Equity mutual funds(Large Cap Funds, Mid and Small Cap Funds, Multicap Funds and Sector specific Funds (Pharma, Technology, Banking, MNC, FMCG)) are considered to give more returns but it depends on the market. More the risk more returns, but you can have a loss too.
- Debt Mutual Funds are considered as safe options as the returns can sometimes be in the single interest figure but hardly negative.
- Liquid Mutual Funds are better than Fixed Deposits and you can park your money as long as you want. Interest will be ranging from 6% to 7% depending on the fund.
So, if you want more profit on your investment, You need to invest some amount in different types of mutual funds.
Term of Investment
I have been saying this in many of the articles on this site that if you keep for a period of more than 15 years, you can see yourself building a solid corpus owing to compounding effect.
Short Term Goals:-
But in case you have a short term goal, that is to buy a vehicle or pay fee for a University course you can invest in
- Liquid Funds: As the term says ‘Liquid’ funds, you can liquidate your investment whenever your want. It is better than Fixed Deposit as Fixed Deposit requires you to commit for a number of years. It is also good alternative to savings account.Example: Axis Liquid fund, Reliance Liquid Fund
- Ultra Short Bond Funds: These are mutual funds investing in fixed income securities. Not as liquid as liquid funds as these have exit load, that is the fee charged for early removal of money. These have small time periods for 1 to 3 years. Example: Franklin India Ultra Short Bond Fund.
- Short Term Debt Funds:- Also called as Income funds, this is a good option for short term investment less than 3 years. Example HDFC Short term Debt Funds,
Long Term Goals
For your long term Goals like purchasing a home or for retirement, you can invest in
- Large Cap Equity Funds: These mutual funds invest in large cap companies so have a low risk high returns as the companies are in the blue chip category. Example: Axis BlueChip Fund, ICICI Prudential BlueChip Fund
- Mid Cap Equity Funds: These mutual funds invest in mid cap companies. Its risk is higher than large cap equity funds. You need to remain invested for 7 to 10 years to see to see good benefits. Example: L&T Midcap Fund, Invesco India Mid Cap Fund
- Small Cap Equity Funds:- These mutual funds invest in small capitalization companies. As these companies have a high potential for growth you can see higher returns but yes there is higher risk. Example: HDFC Small Cap Fund, SBI Small Cap Fund, Reliance Small Cap Fund.
The BIG Question-Are Mutual Funds Profitable?
The BIG Answer is YES!
As with any other investment, people investing in Mutual Funds are also seeking Profit. There are thousands of new investors owing to the ease of investment through online and Mobile Apps.
With Lump sum investment, keep track of the right time of investment.
With SIP, be disciplined with your investments.
Choose a mixture of equity and debt funds. Review your portfolio after some period.
Invest for a long term like 15+ years.
If you invest wisely, you will surely make a huge profit owing to the Compounding effect. But since Mutual fund investments are subject to market risks, no one will be able to tell how much profit.