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Mutual funds are the ideal choice for small retail investors. They are suitable because of a systematic approach towards investing with as little money as available. They bring optimal risk-adjusted returns.

Mutual funds tend to encourage investment by small investors who either do not have the time and knowledge of the stock market or are wary of its swings. A mutual fund collects the resources of the subscribers and invests in stated instruments. The instruments chosen and their combination within the fund’s scheme are dependent upon the objectives of the scheme. Therefore, there are basically two types of mutual funds – equity oriented funds and bond funds. In the equity funds, the fund manager invests in the stocks of publicly traded companies. In bond funds, investment is made in fixed-interest bonds for specific duration. Within these two categories, there are sector-wise funds as for oil, steel, pharmaceuticals, biotechnology etc.

There are also funds that focus on companies within certain ranges of capitalization. Therefore, we have Large Cap Funds, Midcap funds, Growth Funds and Small funds. Suffice to say that the choice of investing style and management of the fund depends on the income perspective of the fund. If regular income with minimal risk and repayment of capital at the end of tenure were the objectives, the investor would choose bond funds. If above average returns along with appreciation of capital were the chosen objectives, the investor would prefer equity-oriented funds.

There is no single definition of a good or bad performing mutual fund. Returns from mutual funds depend on the performance of the underlying investment. The general economic environment impacts the performance of companies. Therefore, it pays to choose a mutual fund depending on one’s own preferences for regularity of income, risk averseness and repayment of capital.

In general, equity-oriented funds have better returns because companies often plough back their profits to build capacities that in turn bring additional profits. Therefore, such funds give inflation-proof returns. However, the biggest disadvantage is that they can be highly risky. On the other hand, bond funds give low risk returns that are stable and with a fixed time horizon.

Performance of mutual funds is tracked by fund managers and rating agencies. There are several websites as well as financial dailies that offer up-to-the-minute details of performance indicators. Top performing mutual funds are shown with comparative figures for one-month, three-month, year to date and five years cumulative performance. Merrill Lynch Latin America, Fidelity Latin America, Matthews India, ProFunds Telecom UltraSector Svc and ProFunds Pharmaceuticals UltraSector Inv are some of the top performing mutual funds.

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