Choosing the appropriate mutual fund goes beyond mere luck. It entails a well-thought-out choice that combines your personal situation with the unique qualities of the fund.
Navigate the world of mutual funds with the tools this guide has given you, making it an exciting experience.
Mutual funds, what are they?
A mutual fund is a financial instrument that gathers funds from different investors and then allocates them into a well-diversified assortment of stocks, bonds, or other types of securities. The primary objective is to achieve profitable outcomes for the investors, contingent upon the fund’s overall performance.
Types of mutual funds
- Equity funds are suitable if you seek higher returns over the long term and are willing to shoulder a higher level of risk.
- Debt funds provide a prudent and cautious investment option, minimising risks by focusing on fixed-income instruments such as government bonds and corporate debentures. These funds serve as a haven for investors seeking consistent and secure returns.
- Combining the finest aspects of the two domains, hybrid funds embark upon an investment strategy that involves a blend of debt and equities instruments. This diversification endeavour aims to strike a harmony between risk and return, rendering them appropriate for individuals who seek an intermediary path.
Factors influencing mutual fund selection
1) Investment objective: Your investment objective is the compass that guides your financial journey. Clearly define your goals, whether short-term needs like a vacation or long-term aspirations like retirement. Different mutual fund categories cater to specific objectives, so understanding yours is the first step towards making a wise investment decision.
2) Time horizon: The duration for which you plan to invest plays a crucial role in determining the type of mutual fund that suits your needs. Short-term goals may align with debt funds, while equity funds are ideal for those with a five-year time horizon. Aligning your time horizon with the right fund category helps optimise returns and manage risks effectively.
3) Risk tolerance: Assessing your risk tolerance is imperative in choosing the appropriate mutual fund. The riskometer, mandated by SEBI, provides a clear understanding of a fund’s risk levels. You can identify the fund categories that best match your preferences and align with your financial goals based on your risk appetite- low, moderately low, moderate, moderately high, or high.
Factors to consider when choosing the best mutual fund scheme
1) Performance against benchmark
Every mutual fund scheme is associated with a benchmark index that serves as a standard for performance evaluation. A large-cap fund, for example, should align with a large-cap stock index. Analysing a fund’s performance against its benchmark helps gauge its efficiency and adherence to its investment philosophy.
2) Performance against category
Comparing a mutual fund’s performance within its category provides valuable insights. For an accurate assessment, compare a large-cap equity fund only with its peers in the large-cap category. This ensures a fair evaluation of the fund’s standing within its specific segment of the market.
3) Consistency of performance
Consistency is key to a successful mutual fund investment. Look beyond high returns and focus on funds that have demonstrated stability over various market conditions. A fund’s ability to perform well during bullish and bearish phases indicates its resilience and reliability as an investment.
4) Fund manager’s experience
The person steering the ship is as important as the ship itself. Evaluate the experience and track record of the fund manager. Consider their tenure with the specific fund and their overall experience in managing various funds. A seasoned and skilled fund manager can significantly impact the fund’s performance.
Investing in mutual funds is not a one-size-fits-all approach. Remember, systematic investment plans (SIP) can further enhance your investment strategy by allowing you to invest regularly, harnessing the power of compounding for long-term wealth creation. Choose wisely, stay informed, and watch your investments grow steadily.