When investing in mutual funds, investors should remember two factors. First is the time horizon (which you have already decided), and second is the risk that investors want to take. Mutual funds can provide a steady annual return of 7-8 percent to 33–35 percent for equity funds.
If you are looking for a low-risk investment, I suggest you look for short-term funds with arbitrage or debt. Almost every one of these two funds has been capable of giving positive returns every year for the last five years, irrespective of the market situation. You can expect a return of 8–10%.
If you have a high-risk tolerance, you can choose diversified equity and balanced funds. Diversified funds are a good option because they invest at least 65 percent in equity and remain in debt, so even if the market does not do well, they have better returns than equity funds. So, you like both equity and debt the best. You can expect double-digit growth for these five years, but individually, the annual growth may be negative.
Another option is to go to ELSS funds. Portfolios in these funds are invested in Equity or Equity related products. Returns are higher than balanced funds, but there is a risk. An advantage among ELSS funds is that these funds provide tax benefits (personal / HUF) under Section 80C of the Income Tax Act, 1961, according to which an investment of up to Rs 1 lakh in ELSS is deducted from taxable income.
Mutual Fund Benefits:
- Higher returns—Within a year, mutual funds have the potential to generate returns of up to 30% -40%. This is possible because mutual funds consist of securities (stocks, bonds, etc.) that are carefully selected by the fund manager to beat the market or to meet the benchmark index. The portfolio is highly diversified and designed to generate high profits for investors.
- Low cost - Mutual funds do not cost you as much as stocks and other securities. On their NAV, you can buy the Mutual Funds unit. And when you purchase mutual fund shares, you do not pay very high transaction fees. That leads to higher returns for you. Remember that there are two schemes for a mutual fund - Direct and Regular. Direct plans cost less when you purchase directly from the fund house, while regular plans cost more when buying a mutual fund through a dealer.
- Simplicity - Mutual funds are easy to understand - Each mutual fund consists of securities (stocks, bonds, etc.), and the sole purpose of a mutual fund is to generate revenue for its investors, i.e., you. Mutual funds are a basket of fruits, vegetables, etc. Because we need more time to read about stocks daily and track our investments, it is effortless to invest in mutual funds and give to a professional manager to take care of the portfolio and our money.
- Diversification - Since mutual funds include stocks and bonds, they are highly diversified. These may consist of stocks from different industries, which states that other stocks may go up if the share goes down. Diversification helps reduce the overall risk of the portfolio. For example, a mutual fund can own hundreds of shares or bonds. That implies that if some of these securities were weak, others may perform better and help investors generate good revenue.
