Where to invest? | Best Mutual Funds 2022

 

Hi everyone. Welcome to today's blogs 

So on today's Blogs, we are going to have a very honest

conversation about buying mutual funds in 2022.

Many times I get the question that hey

blogger, can you tell me which is the best mutual fund I can buy?

I don't know much about stock markets, but I want to start my investing journey.

So looking for great mutual fund, please suggest. Then this Blogs is for you.

This Blogs is also for your parents and friends who have just started their

journey in the stock market or are mutual fund investors.

Please, please, please share this Blogs with them.

Super important.

Along the way.

I will take names of several companies, right?

I mean, of course, now if I'm taking names

of several companies, no company is going to sponsor this.

I'm taking those names from the point of view of giving you requisite

information and practical information so that you can make adequate calls.

It does not look like a theory exercise.

So I will suggest names of different mutual funds along the way.

Explain you the logic why it makes sense

to invest in this type or these types of mutual funds.

So let's get the Blogs started.

I will speak in six simple points.

Please read the Blogs till the very end,

only then it will make sense.

Okay, so the moment we decide to invest

our money in mutual fund, our first step is to go on Google and type

what are the best mutual funds to buy in 2022?

So this is what we will do.

And then we'll go on some random article, whichever article comes at top and then we

will start looking at what? We will look at names of the companies if they are

giving what type of returns have they given?

So we will look at Axis blue chip fund growth.

This has given annualized return on 21.17, ICICI has given 18.45.

So Axis blue chip fund is the best and let me go and invest my money.

Horrible, horrible, horrible way of making investments.

And I don't know why they give previous performance of mutual funds.

It does not make any sense.

And let me explain you why.

So what are mutual funds? Mutual fund are collection of stocks.

If you're not sure what mutual funds are,

this is the Blogs that I've done where I've explained all the basics.

Please go and read it.

Then read this Blogs. Ok.

Back to this topic.

So if we compare stocks with mutual funds,

this is the scenario, for example, when you buy any stocks.

So let's say that you are buying HDFC stock.

So what are you doing?

You're buying and investing your money in one single stock.

Now if you look at the past performance

of this stock because the management usually stays the same or there is very

little churn, there is a history associated with that company.

There is a brand value associated with that company.

Makes sense to do this

historic analysis of a stock. Makes sense?

For example, if I say HUL, there is a certain brand value of HUL.

If you're putting your money in HUL makes

sense because you are doing a brand value based investing.

But when you are taking a look at mutual

fund, mutual fund is a collection of stock.

It's not as if that if one mutual fund house has purchased a HDFC bank today,

they are going to keep it next year also in the year after that also, so on and so forth.

If a mutual fund house or a particular mutual fund purchases, let's say ten stocks.

Right. Ten stocks, they might churn it next year.

So the ten stocks where they would have played with in a past year which would

have generated 25, 30, 40% return that they are advocating.

These are not the same stock that they might be playing with this year.

Looking at the historic return of mutual fund does not make much sense.

It can be a very tiny indicator.

But don't go go by the analysis that they,

you know what? Axis mutual fund has given like 25% return.

Therefore I will go and invest my money.

Please do not make this mistake.

This is the worst mistake that people make and lose a lot of money in mutual fund.

Do not do that. Do not do that.

Okay, very quickly.

What are the some other basic mistakes that you should avoid?

Number one please invest your money

in direct mutual funds, not regular mutual funds.

Now almost all the mutual fund are of two types.

One is a regular plan and one is a direct plan.

Direct plan means that you're going

and investing your money directly with that mutual fund house.

For example, if I am buying XYZ mutual fund run by HDFC and if I am purchasing

their direct plan, then I am purchasing that mutual fund directly from HDFC.

Right? This is direct.

Therefore it is called as direct.

Second, they term it as regular.

They should rather call it as more commissions based mutual fund.

Now under regular,

what happens is that you are being sold that product via a mutual fund agent.

Now if an agent is involved,

they are going to charge a little bit of Commissions also so you as an investor

will lose money in forms of higher commissions.

So a simple choice to make that please do not purchase regular plans.

Please purchase direct plans. Very important.

Yes, mutual fund agents can give you some advice which can help you save money.

All that things are there.

But in India mutual fund agents,

I am not trying to be cynical here,

but mutual fund agents do not give you the advice that they are supposed to give

in return for the amount of money that they are charging in forms of Commissions.

Rather go directly and invest via direct mutual funds.

Now, the second key thing that you must remember is that buying a mutual fund is very complex exercise. It is as complex as buying stocks because there are so many different types of mutual fund that are there.

There is large cap, small cap, mid cap, there is equity, there is hybrid, there is debt, there is short term debt, there is long term debt, so many so many that you will get confused the moment you start reading about mutual funds. So what should you do? So you should follow these following five

different types of points that I'm trying to outline now so that it helps you understand what type of purchases you should make in the mutual fund industry.

So the first type of mutual fund investment that you can make is that you can go and invest in an index based mutual fund.

So let me very quickly explain what index as mutual funds are.

These are the simplest, easiest, and most reliable types of mutual funds.

These are called a passively managed mutual fund.

So let me give an example and help you clarify what index based mutual funds are.

So in India, you have two types of indexes.

One is called as Nifty 50, right?

And one is called a Sensex.

Now what is Nifty 50? Nifty 50 is essentially a collection of top 50 companies in India.

Now, if you take shares of these top 50 companies, put it in a basket of top 50

stocks, you start putting them in a basket that is called as index fund

Nifty 50 or Nifty 50 index fund.

Right now, different different companies,

for example, these will be companies like ICICI, SBI.

All of them will have their own variant of this index fund.

At the end of the day, you are buying the same instrument, no difference at all.

You would say that blogger, what is the primary advantage of buying index funds?

So the first key advantage of buying

an index funds that you know what you're buying.

How?

Because when I gave you the example of Nifty 50 index mutual fund,

you know what you are buying, you are buying the top 50 companies in India.

So you are at least understanding the product that you are buying.

Number

two advantage of index funds are that these are passively managed mutual funds.

Therefore, the commissions, commissions are low.

Commissions can be exit load entry load a bunch of different things.

But there is a very important Commission which is called as expense ratio,

expense ratio.

Now, expense ratio essentially means that if you are paying RS100

to a mutual fund, then the mutual fund might take out,

let's say Rs1 for the salary of the fund manager and all the other people who are

involved in terms of running that mutual fund, index funds are passively managed.

So passive management of mutual fund means its not as if that the mutual fund

manager will need to sit and research what to buy, what to sell all that stuff.

No, they don't need to do any of that stuff.

All they simply need to do is just mirror the Nifty 50 index and be done with it.

Therefore, their team size is low.

They don't need to run too many offices.

They don't need to run AC all day.

All that good good stuff.

Therefore, the expense ratio of these index fund is low.

Right? Very, very important concept.

This is the second key advantage.

The third key advantage is that the risk reward equation makes sense.

Right? What do I mean by risk reward equation?

For example, if you go and buy small cap

funds, the chances are that you might make 30% return.

The chances also are that you might make

negative 30% return. Why? Because the small cap funds, the risk is very high.

These are highly volatile stocks that you are purchasing.

If the market is doing well and if those

companies are doing well, you might make a lot of profit.

Similarly, you might make a lot of loss.

So the risk reward equation is that high risk, high reward type.

Now the risk adjusted return that you

should be getting from your mutual fund should make sense.

And index funds are good instruments from that angle.

Now, historically speaking, if you compare index funds with comparable

instrument, which is large cap equity based mutual fund, then studies indicate

that index funds have given higher return compared to large cap equity mutual funds.

What are large cap equity mutual fund?

These are again similar to Nifty 50 type of company stocks,

but in that case the fund manager is

sitting and doing a lot of analysis and is actively trading.

Therefore, large cap equity based mutual

fund are considered to be active mutual fund.

Index funds are called passive mutual

fund. So I hope this helps you understand the key advantages of index funds.

That you know the product that you are

buying, you are paying lower commissions and your risk reward equation makes sense.

So now you might ask me that

ok, index funds.

Same type of people are selling index fund whether

it's HDFC whether its SBI, whether it's ICICI.

So which company should I prefer?

You should prefer a company that has the lowest expense ratio.

Now this is very easy to find out.

You simply need to go online and you need to type lowest expense ratio index fund

India and then you will get the information.

So you literally go on economic times. This is an article.

Look at what funds are giving this. So Navi Nifty 50

Index Fund seems to be good.

They are offering lowest expense ratio of .6 make sense same bucket of instruments.

You just have to pay lower commissions.

Why not go with this. Now,

second thing is that Motilal Oswal is charging 0.1% as charges.

So charges are higher than Navi. Then you have Nippon.

Now here the expense ratio is 0,15 so it keeps on getting higher and higher. S0

essentially, just look at the fact that hey, this Navi seems to be new.

Is it reliable? So Navi mutual fund started by Sachin

Bansal, very reliable entrepreneur, is doing good work.

So safe mutual fund expense ratios are low.

So if I have to invest in index based

mutual fund, I will go with low expense option which is Navi. Super simple.

There is absolute zero complication here.

Now you might say okay, blogger valid points about index funds.

But you know what?

I'm like a type of hope who likes to invest in active mutual fund because I

somehow believe that my mutual fund managers are going to give me much higher

return than index would give. A couple of points there,

and then I'll explain you the logic behind large cap mutual fund

also, then I'll take you through active mutual funds

also, don't worry about that.

So a couple of things that you must know. Number one, as I said earlier,

that history proves that index funds have given higher returns compared to large cap

equity mutual funds on a 20 year CAGR basis.

This is one. Second thing,

your mutual fund manager is not going

to beat the index by much, even if he or she is very good on a consistent basis.

Why is that?

There is a fundamental sound reasoning behind it.

First, let me give you a parallel example which I have given on one of my earlier

Blogss, but it will help you understand the point better.

So let's imagine that you're in class 10th.

You write the board exams, you get like 90% marks, you show it to your parents.

They feel very happy that hey you have

done well what would be their expectations next year?

Next year they would assume that you get like more than 90% Marks in 11th.

So you work really hard.

You get like 94% Mark,

then in class 12th somehow it happens that you end up scoring 85% marks.

Now in my time. 85%

marks in 12th used to be really good.

But point is that if you show those 85% marks to your parents,

they will be disappointed despite 85% Marks being really good in absolute terms.

Now why is that?

That's the same scenario that plays out when you are investing in mutual fund,

you are the parent. So if your mutual fund manager,

let's say in 2019 gives you 15% return, right, he beats the index.

So you will feel very happy.

You will expect next year 18% return.

Okay, the mutual fund manager works really hard.

18% return. Then somehow in the third year,

he or she is not able to beat the market and you only get 10% return.

Then you will start fretting that you know

what this person used to give me like 15% 18% return.

Now I'm only getting like 10% return so

your mutual fund manager will never inflate your expectation.

Otherwise they will have to constantly

beat their own performance and it's easier for them to keep on hitting that 10-12

percent index bench marking return compared to giving you

25% return consistently.

This is a very important concept.

Now you can make a call whether to invest

in actively managed mutual fund or passive mutual fund.

Now, I'm not trying to say that all mutual fund managers are bad.

I'm just trying to tell you a general rule.

With that said, let's discuss large cap equity based mutual funds

also. So in case you are looking at large cap

equity mutual fund, ET money has a very good collection.

You can take a look at the entire website and you can start comparing different

mutual fund options in the large cap segment.

Large cap essentially means bunch of really good companies.

Now you have Canara Robeco.

First thing, what do you need to see?

Expense ratio, right.

So 0.36, then you look at Kotak, 0.87.

You can look at Axis, 0.46.

Similarly, if you scroll down Edelwiss, 1.09.

Honestly, no point going and subscribing to mutual fund where your expense ratio is

more than 1% for large cap, you will lose so much money in Commission.

So please don't opt for mutual fund where the expense ratio is very high.

So here you can simply go for any of these mutual fund.

So what is the next factor that you need to keep in mind?

So let's look at Canara One.

Now you need to scroll all the way down.

Don't worry too much about what the historic returns have been.

Again, we have done that discussion.

So you need to go down and you need to take a look at stock holdings.

So you'll see

okay, some really good companies you have HDFC, ICICI, LNT, these are names that you

would have heard and this portfolio makes approximately like 50 60%.

So good portfolio going into good companies that you understand.

So number one, you must understand what

companies your mutual fund manager is buying.

This is the number one thing.

Second, you should look at the sectoral focus.

For example, Canara's equity fund is 34% concentrated on the finance sector.

Ok. Now if you are someone who believes

in tech more, then probably this is not the mutual fund

for you. You should go and invest your

money in some other large cap equity mutual fund.

Right. This is again very important point.

Even if you do these two things, these three things rather.

One, look at the expense ratio, number two, look at specific stocks.

Three, look at sector allocation.

If you do these three things, you will be able to make much wiser choices.

If you are struggling with all this again, go back.

Just invest in index funds.

You are good enough, you will already be diversified.

So essentially, in terms of buying a large cap, I can't give you a recommendation

because I don't know which sector you would want to invest in.

Would you want to invest more money in finance, then?

Yes, this particular Canara Robeco

bluechip equity mutual fund might work really well.

If you are more into tech, then some other funds might work best for you.

So just go scan through different mutual funds and make your investment choice.

All right.

So let's try to do a similar exercise for mid cap and small cap mutual funds

also. I'm clubbing both mid cap and small cap in one lump altogether because

the fundamentals of making investment in these funds would stay the same.

So in terms of mid cap, again,

I'm going to ET money looking at a bunch of different options.

So number one, look at expense ratio

eliminate the ones that are super expensive.

For example, Tata Midcap Growth Fund 1.07.

I don't know why UTI SBI all Super Super expensive.

Nippon 1.2 when you are getting these

mid cap funds at 0.49 0.34 then why are you paying an expense ratio of 1.2?

Beats me. Right.

So let's look at any one of these so

that I can explain you the further fundamentals.

Again, same thing.

Number one, look at the expense ratio. Number two,

what is it that you would need to do?

You would need to take a look at the top stock holdings.

This is where the problem would arise.

So if you take a look at where this mutual fund has invested,

you will understand some companies and you will not understand many companies.

For example, you might understand HDFC

Bajaj finance.

These are companies that you frequently keep hearing of, but you might not have

heard of Crompton Greeves or you might not have heard of Astral Poly technik.

So with mid cap and small cap, if you're a novice investor,

then chances are that you do not know where your money is going.

Okay. Super risky proposition because you are

literally trusting someone with your money blindly, literally blindly.

That's one. Second thing,

if you actually aggregate all this, these are the top holdings.

This entire aggregation will not come out to me more than I think 30%.

So you don't know where your 65 70%

of rest of the money is going from this mutual fund.

Again, you will have a very hard time

keeping a track of where your money is going.

So this is super risky strategy.

If you're doing this,

at the very least, at the very least, at least do this analysis right.

If you can't understand much, that where the fund is focused.

Now this fund Axis midcap direct plan growth.

This is a highly diversified fund.

I advocate diversification, especially on mid cap and small cap,

because what these people are taking, they are adopting a hedge fund and VC fund

strategy. That go and invest in a bunch of companies.

At least some of these companies will make

really big and the winner will compensate more than enough money for the losers.

So that is the reason why I would advocate if you are investing in mid cap and small

cap, be super diversified, it's completely fine and invest in mid-cap

and small cap mutual fund that are really diversified.

If you invest in a mid cap or a small cap,

that is like let's say 70% diversified only in chemicals industry.

And if something bad happens to chemicals

industry in mid cap and small cap, what will happen?

Mid cap and small cap funds are very small.

They also usually have debt so they will

just go under or you will lose all your money.

So please don't make that mistake. Stay diversified.

This is the key principle that I wanted to highlight.

Now, the fourth type of mutual fund are called as debt mutual fund.

Debt, debt mutual funds.

So debt mutual funds are what? So essentially there are two types of things.

One is equity, one is debt, right?

Equity means that you're going and buying

equity or share, share and equity are one and the same things of a particular company.

So let's say that if you are buying HDFC bank stock, then what are you purchasing?

You are buying equity.

If your mutual fund manager goes and invest your money in equity instrument

of HDFC bank, then he's purchasing equity on your behalf.

On the flip side,

if your mutual fund manager is buying corporate debt corporate debt of HDFC bank

then you're a debt owner, not an equity owner.

Debt are essentially loans, right?

Debt are essentially loans.

Okay, quick question for you.

The question is that do you think fixed deposits are debt or equity?

So comment below and give me the rational. So very quickly,

if you are talking about debt mutual fund.

So debt is essentially the loan that you're giving out.

And debt is also of two types.

One is a very short term debt.

For example, this debt literally matures

in 90 days and debt can also be long term.

So essentially there are two types of debt funds that I'll talk about here.

One is a liquid debt fund, so liquid debt fund is very useful for people like me.

So when people like me who make a lot of direct equity investment,

if you are not finding any useful opportunities in the market,

what we will do is that we will park our money in liquid debt fund.

Why? Because they are very easy to withdraw.

So they give more returns compared

to savings deposit and almost equivalent return compared to fixed deposit.

Plus there is no lock in period so I can

put my money or park my money in liquid debt fund and withdraw it when the market

is in good shape and I want to make lumpsum investments.

The second type of instrument is called as

long term debt and this is usually useful for people like my parents.

So my parents want to play it safe.

They don't want to take unnecessary risk with their money.

They would invest their money,

not park their money, invest their money in safer instruments.

So these are debt so they will go and buy debt mutual fund.

Honestly, you can buy literally any mutual fund.

They will almost invest in almost similar type of debt instruments.

Not a problem. Again, do the same exercise.

Look at the expense ratio.

Look at the portfolio, but portfolio would not have too many options.

Usually debt funds play it very, very safe.

What you need to remember about debt mutual fund is that are you just there

parking your money like me or are you investing your money in debt mutual funds?

Please keep that in mind and accordingly, invest.

Now final type of mutual fund is called as hybrid mutual fund.

These are hybrid. So hybrid means debt is also there,

equity is also there. It's a mix of both.

You have given a lot of freedom to your

fund manager to go and do whatever he or she wants.

So they charge a lot of money.

Historically speaking, hybrid mutual fund charge the highest expense ratio.

And according to me, these are the worst form of mutual fund investing.

Please do not do it. Please literally at least listen to one

of my requests that please don't invest in hybrid mutual fund because number one,

you're not even sure what is happening, right?

Your money can be going in equity

also, it can be going in debt

also, you don't know what is happening. So please don't do that.

Either invest your money for safety.

If your goal is safety, please literally go and invest your money

in safe debt mutual funds or in fixed deposits completely fine.

It's completely okay to invest your money in fixed deposits

also, if you are risk averse and you understand that

hey, I am risk averse person.

I don't need to do that.

Second type of investor would be that

hey, I am like a growth oriented investor.

So invest in equities and index funds.

So please understand what is it with what goal you're investing your money.

Don't let people manage your money on your

behalf without even you realizing where your money is going.

This is a very important statement and I

will say it out slower that if you don't know what you are doing with your money,

then other people will make money out of your money.

So don't do that.

Don't put yourself in that situation.

Please rewind this Blogs.

read it multiple times, show it to your parents,

show it to your friends so that they understand very basic concepts around

mutual fund investing because all of us would invest in mutual fund at some stage.

Right? We would be investing.

I also used to invest a lot of money in mutual fund.

Now I mostly do direct equity

based investing or index investing.

But when we are starting out, this becomes a very important component

for us to keep in mind so as to preserve our financial sanctity.

So from that perspective,

at least learn the principles that I have taught you through this Blogs.

Share it with your friends.

Please give it a love and I will keep posting with other topic in the next time.