Investing in mutual funds is a great way to grow your wealth, but choosing the right types of funds is crucial if you’re looking to double your investment in five years. While no investment can guarantee returns, selecting the right mutual fund investment with the potential for high growth can bring you closer to your financial goals. In this article, we will explore the types of mutual funds that may help double your wealth in five years and also discuss some of the top tax-saving mutual funds that can offer attractive returns while providing tax benefits.
How much return is required to double your wealth in 5 years?
Before diving into the types of funds, let’s do a quick calculation. You would need an annual return of approximately 14.87% to double your investment in five years. This may sound ambitious, but specific categories of mutual fund investments have historically delivered these kinds of returns.
Types of mutual funds that can potentially double your wealth
Here are some types of mutual funds that, while inherently riskier, can help you achieve your goal of doubling your wealth within five years:
Equity mutual funds
Equity mutual funds invest primarily in stocks and have the potential for high returns, especially over a longer time horizon. There are different sub-categories of equity funds that you can consider based on your risk appetite and investment goals.
- Large-cap funds: These funds invest in well-established companies with a proven track record. Although large-cap funds may not offer the highest returns, they tend to be more stable, making them a good choice for investors seeking balanced growth.
- Mid-cap and small-cap funds: Mid-cap and small-cap funds can be excellent options for higher growth potential. These funds invest in medium-sized and smaller companies in their growth phase and can provide significant returns. However, they also come with higher risk compared to large-cap funds.
- Multi-cap funds: Multi-cap funds invest in a mix of large-cap, mid-cap, and small-cap companies, offering a balanced approach to growth and risk. These funds can offer diversification within the equity space and double your wealth over time.
ELSS (Equity-Linked Savings Scheme) mutual funds
Top tax-saving mutual funds that offer high returns while providing tax benefits fall under the ELSS category. ELSS mutual funds primarily invest in equities and offer tax deductions under Section 80C of the Income Tax Act.
With a lock-in period of three years, ELSS funds offer high growth potential as the investments are primarily in stocks. Investors can benefit from both capital appreciation and tax savings, making it an attractive option for those aiming to grow their wealth quickly.
Sectoral and thematic funds
Sectoral and thematic funds focus on sectors such as technology, healthcare, and finance or themes like green energy or innovation. These funds can deliver substantial returns if the industry or theme performs well during the investment period. However, they are high-risk investments since they rely heavily on the performance of a particular sector.
For investors who are willing to take a calculated risk, these funds can provide the high returns needed to double their wealth in five years.
Hybrid mutual funds
Hybrid mutual funds, also known as balanced funds, invest in both equities and debt instruments. This balances risk and reward, as the debt portion stabilizes the portfolio while the equity portion offers growth potential. There are different types of hybrid funds, such as:
- Aggressive hybrid funds: These funds allocate more of their portfolio to equities (typically around 65-80%) and the rest to debt. This mix allows for growth while managing risk, making them a suitable option for investors aiming for wealth growth over the medium term.
- Balanced hybrid funds: These funds maintain a 50-50 allocation between equity and debt. While they may not offer the same growth potential as aggressive hybrid funds, they provide more stability.
Index funds
Index funds aim to replicate the performance of a specific index, such as the Nifty 50 or Sensex. These funds are passively managed and provide broad market exposure. Over a longer period, index funds can generate solid returns by tracking the overall market’s performance.
Since index funds follow a specific index, their performance is closely linked to the general market trends. If the market performs well over five years, index funds can deliver significant returns and help grow your wealth.
Factors to consider when choosing mutual funds
While aiming to double your wealth in five years is an ambitious goal, it’s essential to consider a few key factors when selecting mutual fund investments:
- Risk tolerance
Equity-oriented funds, particularly mid-cap, small-cap, and sectoral funds, can deliver high returns but come with greater risk. Assess your risk tolerance before investing in these funds. If you’re uncomfortable with market volatility, consider investing in a combination of equity and debt funds to balance risk and returns.
Investment horizon
Since you aim to double your wealth in five years, ensure that the mutual funds you choose align with this time frame. Equity funds generally perform well over a longer horizon, so selecting funds with a minimum of a 5-year investment period is crucial.
Diversification
To mitigate risk, it’s advisable to diversify your investments across different types of mutual funds. By spreading your investment across large-cap, mid-cap, hybrid, and sectoral funds, you can reduce the impact of market volatility on your overall portfolio.
Top tax-saving mutual funds to consider
If you’re looking for mutual fund investments that can help you save taxes while growing your wealth, consider the top tax saving mutual funds under the ELSS category. Some of the leading ELSS funds in the market include:
- Axis Long-Term Equity Fund
- Mirae Asset Tax Saver Fund
- Aditya Birla Sun Life Tax Relief 96
- Canara Robeco Equity Tax Saver Fund
- DSP Tax Saver Fund
These funds have a proven track record of delivering solid returns while allowing you to claim tax deductions under Section 80C.
Conclusion
Doubling your wealth in five years is achievable if you select the right mutual fund investment. Equity funds, top tax saving mutual funds under ELSS, and hybrid funds can help you generate high returns, especially if you are willing to take on some level of risk. Diversification, understanding your risk tolerance, and staying invested long-term is crucial to achieving your wealth goals.
By carefully selecting mutual funds that align with your financial objectives, you can build a robust investment portfolio and work towards doubling your wealth within the desired time frame.
