The Simplest Guide to Selecting a Mutual Fund

If you’re new to investing in mutual funds, your mind would be buzzing with many questions. The most prominent of those questions would be – ‘Which mutual fund to invest in?’ Indeed mutual funds are a great option for investors trying to beat the challenges of diminishing returns in savings and fixed deposits.

Read the following 3 steps to easily select a mutual fund.

Step 1

The first step is to choose the time period for which you will invest. Be careful in determining this. Take into account every possible expenditure that you may have to make in the future.

 

Step 2

Once you are sure of the duration, decide the type of fund you should invest in.

Investing for Less than 2 years: For this duration, invest in debt funds. These funds invest your money in money market instruments. They are considered to be low risk mutual funds.

Historically, they have given returns in the range of 7-10% per annum.

Debt funds are of many types. The table below will help you choose the ideal debt fund type based on your investment duration.

 

Type of Debt Fund Ideal Duration
Liquid Funds Few days – few weeks
Ultra-short Term Funds 6 months – 1 year
Short Term Funds 1 year – 2 years
Gilt Funds More than 1 year

 

Investing Between 2 & 3 years:

When investing for such a duration, you can take a little more risk. You can invest in balanced funds. Balanced funds invest partly in money market instruments and partly in equity. They are a hybrid of debt funds and equity funds.  Their returns have been in the range of 8-12% per annum. Good performing balanced funds have given even higher returns.

 

Investing for More than 4 years:

With a duration this long, you can invest in equity funds. Equity funds are riskier in nature but they also give much higher returns. In the past, they have given returns between 12-20% per annum. When the market conditions are good, some of these funds have given returns as high as 30%.

Equity funds are also of many types. You can use the following table as a guide to choosing which equity fund type will suit you best.

 

Type of Equity Fund Ideal Duration
Large-cap Funds More than 4 years
Mid-cap Funds More than 5 years
Small-cap Funds More than 6 years
Multi-cap Funds More than 6 years

 

Step 3

Now that you know the category of mutual fund you should invest in, you have to choose the exact mutual fund to invest in. Choosing the right mutual fund involves looking at a few key parameters and analysing them properly.

Fortunately, there is an easier way. You can use mutual fund ratings to decide which fund is the best.

You will observe that all of these funds are rated from 1 to 5 stars with 5 stars being the best.

Simply choose the funds with the highest rating!

Some Things to Remember:

  1. Mutual funds do not have any lock-in period (unless mentioned). So you can invest in one type of mutual fund and change later if your investment plan changes.
  2. It is not necessary to stick to the funds based on the duration. If you don’t want to take risks, you can invest in low risk mutual funds for longer duration also.
  3. The longer you invest for, the more risk you can take.

 

Author: Guest author

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