How to choose the best mutual funds in 2021

If you are looking to kickstart your investment plans for 2021, try mutual funds. They are flexible products that allow you to invest for varying timeframes and via SIPs or lump sum investments. Some mutual funds offer high returns but may be risky, while others are ideal for conservative investors. In short, there is something for every investor. Read along to find out how you can zero in on the best-performing mutual funds.

What is a mutual fund?

A mutual fund is an investment tool that pools money from investors and allocates it across different asset classes. Fund managers invest the pooled money in a bucket of financial securities. The securities may include stocks, bonds, and other assets.

Investing in mutual funds has several benefits. Some of them are listed below:

• Diversification: Mutual funds invest in many types of securities, which ensures diversification. As the risk is spread across asset classes, it reduces your chance of loss.
• Professional management: Mutual funds are managed by highly qualified fund managers. They understand how the markets move and are well-equipped to make the necessary adjustments to the fund portfolio.
• Easy to buy: You can invest in mutual funds online. Either approach the mutual fund house directly or invest through your broker. You can compare the performance of different funds from the comfort of your home.
• Liquidity: Mutual funds (except ELSS funds) come with flexible withdrawal facilities. So, these funds can be highly liquid investment options.

How to choose the best mutual funds

You may have wondered about the best mutual funds to invest in. Here are some common criteria to help you choose the rights schemes:

Know your goals

Before investing in a mutual fund, assess your timeframe and return expectations. If you have a longer investment horizon, consider investing in equity mutual funds. These tend to perform well over the long term. However, equity funds can be volatile in the short term. Debt mutual funds may be a safer choice if you have a shorter timeframe.

Factor in the associated risk

Consider your risk appetite before investing in mutual funds. Although equity mutual funds carry higher risk, they may also bring higher returns over the long term. Debt mutual funds offer stability, but the returns tend to be lower. Conservative investors may find debt mutual funds useful.

Assess your liquidity needs

You are the best judge of your liquidity requirements. If you can afford to lock in the cash for a longer period, equity mutual funds are a great option. But perhaps you want to dip into the capital in the short term. If that’s the case, try liquid funds instead. A liquid fund is a type of debt mutual fund that invests in very short-term market instruments. You can exit a liquid fund investment quickly. Plus, they tend to offer better returns than savings accounts and fixed deposits.

Fund performance

Don’t just look at how the fund has performed in the last couple of years. Study the historical performance of the fund and see if it brings consistent returns. Make sure to examine the fund manager's performance over the years as well.

How to select the best schemes on ICICIdirect

You can use ICICIdirect.com or the ICICIdirect Money App to choose the best mutual fund schemes. Follow these steps to start investing:

• Enter your login details.
• Select ‘Mutual Funds’ on the ‘Investing’ tab and then ‘Purchase’.
• You can choose from the recommended funds or enter the scheme details manually.
• Select ‘Buy’ on the scheme and enter the amount you wish to invest.
• Select ‘Confirm’ and accept the terms and conditions to place your order.

What are the best mutual funds in India?

In truth, there is no magic list. Focus instead on finding the best mutual funds for your needs by figuring out your risk profile and investment horizon. Equity funds remain a good choice for long-term investment as they bring high returns. If your investment horizon is shorter, liquid and debt funds may be more suitable.

At ICICIdirect, we make the selection process easier for you. Choose a scheme from the comprehensive list of mutual fund recommendations provided by our research team. You could also check out the iDirect investment baskets. There is sure to be a mutual fund scheme that fits your investment goals.    

The bottom-line

Equity investors had a bumpy ride in 2020 due to the Covid-19 pandemic. But despite the volatility, many investors still earned good returns. Mutual funds can be very effective in times of volatility, especially if investors use the SIP mode. By investing a fixed amount at regular intervals through a SIP, you can mitigate volatility risks and get the advantage of compounding. Keep this in mind while selecting the best mutual funds in 2021. The right mutual fund investment plan can help you reach your financial targets with ease.

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No: 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845.Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The non-broking products / services like Mutual Funds are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.