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What are the best Mutual Funds to invest

Which are the best Mutual Funds to buy at this level of sensex, having medium risk? Which sector will do well now? Will investing in FD is better option than Stocks or Mutual Funds for next 5 years?

Jan 30, 2015 by Shaila, Mumbai  |   Mutual Fund

It is important to understand that if you have a five year investment horizon, then the Sensex level at which you are investing is of not much significance. Market experts believe that we are in the initial stages of a long term secular bull market. One should invest in equities with a long time horizon to get good returns. Since you have moderate risk tolerance you should avoid small and midcap funds. For investors with moderate risk tolerance, equity oriented hybrid funds like Balanced Funds, Prudence Funds etc are good investment options. These funds typically have 60 – 70% investment in equity and the balance in debt. While downside risk of Balanced Funds is limited relative to purely equity oriented funds, Balanced funds have also created wealth for investors in the long term (please read our article, Balanced Funds have also created wealth for investors with moderate risk tolerance).

From a sector perspective the market view is that the cyclical sectors or sectors focused on domestic demand and consumption will be drivers of market growth in the near to medium term. Examples of cyclical sectors are Banking and Financial Services, Automobiles, Capital Goods etc. With the RBI committed to a lowering interest rates the infrastructure sector should also do well in the future but a lot depends on Government policy reforms. However, one should avoid the real estate sector, till we see strong signals of demand picking up. As far as mutual fund investment is concerned, diversified equity funds are better option than sector funds. Good diversified equity funds also have heavy weighting of cyclical sectors (like banks, auto, capital goods etc.) in their fund portfolio. So you can benefit from the growth in these sectors by investing in good diversified equity funds. We have discussed about top performing diversified equity funds in our Articles section.

FD is a very different investment product compared to stocks and mutual funds. Stocks and mutual funds have market risk while FDs are risk free. As far as returns are concerned, again FDs are not comparable with stocks and mutual funds. FDs have given interest of around 9%, while Nifty has given return of nearly 40% in the last one year and annualized 20% in the last 3 years. As far as future outlook is concerned, FD interest rates are likely to go down in the future as we move into a lower interest regime. Stocks and mutual funds, on the other hand, are expected to give good returns in the future, as discussed earlier. Further stocks and mutual funds are more tax friendly investments compared to fixed deposits. While fixed deposit interest is fully taxable, long term capital gains (holding period of more than one year) and dividends in stocks and mutual funds are tax free. Between stocks and mutual funds, mutual funds offer the advantage of risk diversification compared to stocks. However, it needs to be reiterated that stocks and mutual funds have market risks. Therefore, you should ensure that your risk tolerance is aligned with the implied risk in these investments. You should consult with a financial advisor to select the best investment option for your needs.

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