What Are High Return Mutual Funds? Definition, Criteria & How to Choose

What Makes a Mutual Fund “High Return”?

A high return mutual fund generally refers to a scheme that has delivered higher historical returns than comparable funds over a specific period. The term is relative because a fund’s return may vary based on the selected period, fund category, and market conditions.

The following factors may influence a mutual fund’s historical returns:

• Fund Category: Equity-oriented funds may show higher return potential than some debt-oriented categories. However, their market-related risk may also be higher.
• Portfolio Composition: The securities and companies included in the portfolio may influence fund performance.
• Market Conditions: Market trends, economic conditions, interest rates, and sector performance may affect returns.
• Investment Strategy: The fund’s approach to asset allocation and security selection may influence its performance.
• Expense Ratio: Fund expenses are reflected in the Net Asset Value (NAV) and may affect net returns.

Past returns may provide information about earlier performance but do not indicate future returns. Funds may be compared within the same category and over similar periods.

SIP vs Lump Sum: Which Maximises Returns?

The following points explain the differences between a Systematic Investment Plan (SIP) and a lump sum investment:
Investment Method: A SIP involves investing a fixed amount at regular intervals. A lump sum involves investing the entire amount at one time.

• Investment Dates: SIP investments are made on multiple dates. A lump sum investment is made on a single date.
• Purchase Price: A SIP purchases units at different NAVs over time. A lump sum investment purchases units at the NAV applicable to the investment date.
• Return Measurement: SIP returns are generally measured using Extended Internal Rate of Return (XIRR). Lump sum returns may be measured using Compound Annual Growth Rate (CAGR) for longer holding periods.
• Return Outcome: The return depends on the selected fund, market performance, investment period, and investment timing.

Neither investment method provides a fixed return. The method used may be reviewed according to the investment amount, financial objective, and investment period.

Types of Mutual Funds in India

The following are some common types of mutual funds in India:

• Equity Mutual Funds: These funds invest mainly in equity shares and equity-related instruments. Their value may change according to market movements.
• Debt Mutual Funds: These funds invest mainly in debt securities and money market instruments. Their performance may be affected by interest rates, credit quality, and portfolio duration.
• Hybrid Mutual Funds: These funds invest in a combination of equity and debt instruments. Their asset allocation varies across schemes.
• Index Funds: These funds aim to track the performance of a specified market index, subject to tracking error and expenses.
• Sectoral and Thematic Funds: These funds invest in specific sectors or investment themes. Their portfolios may have higher exposure to selected market segments.
• Tax-Saving Funds: Equity Linked Savings Schemes (ELSS) invest mainly in equity securities and have a statutory lock-in period under the applicable tax framework.

The return and risk characteristics differ across fund categories.

What Type of Investor Should Choose Equity Mutual Funds?

The following points explain the factors investors may review while evaluating best equity mutual funds:

• Investment Objective: Equity funds are generally evaluated for financial goals linked to long-term market participation.
• Investment Period: The intended investment period may be reviewed because equity markets may experience short-term fluctuations.
• Risk Considerations: Equity funds are subject to market risk, and the value of investments may rise or fall.
• Financial Position: Investors may consider their income, expenses, existing investments, and financial commitments.
• Portfolio Allocation: Equity exposure may be reviewed as part of the overall portfolio rather than as an isolated investment.

The relevance of an equity mutual fund depends on individual financial circumstances, investment objectives, and risk considerations.

Risks of Chasing High Return Mutual Funds

The following are some risks associated with selecting mutual funds only on the basis of high historical returns:

• Past Performance Risk: A fund that performed well during an earlier period may not report similar performance in the future.
• Market Risk: Changes in market conditions may affect the value of the securities held by the fund.
• Volatility Risk: Some high-return funds may experience significant changes in their NAV over short periods.
• Concentration Risk: Sectoral, thematic, or concentrated funds may have higher exposure to specific industries or market segments.
• Market Cycle Risk: A fund’s earlier returns may be linked to a particular market or sector cycle that may change over time.
• Valuation Risk: Higher valuations of the securities held by a fund may affect future market performance.
• Expense Impact: Fund expenses may affect the net return received by investors.

High historical returns should therefore be reviewed along with the fund category, risk level, portfolio composition, and investment strategy.

Best Ways to Hold Mutual Funds in India

The following are common ways through which mutual fund investments may be held:

• Direct Plans: Direct plans are purchased without a distributor. Their expense ratio is generally lower than that of regular plans because distributor-related expenses are not included.
• Regular Plans: Regular plans are purchased through distributors or intermediaries. Their expense ratio generally includes distribution-related expenses.
• Demat Account: Mutual fund units may be held in dematerialised form through a demat account, subject to the facilities offered by the investment platform.
• Statement of Account: Mutual fund units may also be held in a statement of account issued through the applicable mutual fund investment process.
• Online Investment Platforms: Investors may access mutual fund schemes through registered online platforms, subject to available services and applicable terms.

The holding method may affect the investment process and record management. It does not change the underlying portfolio of the selected scheme.

Conclusion

High return mutual funds are generally identified based on their historical performance over a specific period. However, higher past returns do not represent a separate fund category or indicate future performance. Fund returns may be influenced by portfolio composition, market conditions, investment strategy, expenses, and the selected investment period. Investors may review historical performance along with the fund category, risk level, portfolio concentration, and investment objective. They may also compare funds within similar categories and review scheme-related documents before making an investment decision. Mutual fund investments are subject to market risks, and the value of investments may change.