How to Choose A Mutual Fund That Suits Your Financial Objective
Introduction
- Mutual funds have become increasingly popular among investors of all ages. More and more investors are choosing mutual funds to meet their long- and short-term financial objectives.
- These can include higher education, holiday planning, property investment, retirement planning, or building an additional income source for retirement.
- However, the next question is: which mutual to go with meeting your financial objectives?
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What Should I Consider Before Investing in Mutual Funds?
Before investing in any mutual fund, it is essential to note a few key points.
1. Your financial goals and investment objectives
Determining your financial goals and investment objectives is of primary importance. It helps you understand what you wish to achieve with your investment. As a result, it will help you know how much to invest and for how long, as your goals or objectives can be short- or long-term.
2. Your risk tolerance
Your risk tolerance is the amount you are willing to take on investment risks. It's influenced by your income, lifestyle, and age. Some people have a high-risk tolerance, while others have a low-risk tolerance. Understanding your risk tolerance makes investing in mutual funds easier.
3. The time horizon of your investment
The time horizon implies the duration for which you are willing to invest your money. It can be as short as a few days or can stretch even for months or even years. Different mutual fund categories have different time horizons.
For instance, one to three years is ideal for debt funds, while for equity funds, more than five years is considered best.
How Do I Search for the Best Mutual Funds in India?
To select the most appropriate mutual funds, consider the following factors:
1. The consistency of performance
When looking for mutual fund schemes for investment, consider which funds provide positive and consistent returns over time. Moreover, the funds should generate good returns even during bullish or bearish stock market periods.
2. The experience of the fund manager
A fund manager manages a mutual fund by investing the amount across various financial instruments. Hence, the experience and expertise of the fund manager are significant factors to consider.
3. The track record of your chosen AMC
An asset management company (AMC) is a company that manages mutual fund schemes. AMC's expertise is an important point to note because it directly affects the performance of your mutual fund.
4. The allocation of assets
Financial well-being requires careful asset allocation, which refers to the distribution of your investment across various mutual funds. Asset allocation can be influenced by risk tolerance and other factors. Given below are some preferred investment options:
- Debt funds and arbitrage funds: These low-risk mutual funds are ideal for short-term investment. For building up an emergency fund, consider liquid funds. Go for ultra-short-duration funds if your investment timeline spans from three months to one year. However, if your short-term ranges between one and three years, then long-term debt and arbitrage funds are better.
- Balanced funds: For medium term investments, balanced or hybrid mutual funds can provide a versatile solution with moderate risks. They offer equity (which can provide returns above inflation) as well as debt (which mitigates overall risk).
- Equity funds: For long term financial goals like retirement planning, equity-based mutual funds have the potential for higher returns.
5. Various mutual funds in the market
Analysing the various mutual funds available to understand their performance against benchmarks is a must. For example, some funds have the NIFTY index as their benchmark.
Also, take into account the expense ratio, compare the performance of your preferred mutual funds against similar funds, and observe the exit load.
6. Professional help
It can become a bit difficult to understand all this financial and technical jargon. If you feel stuck, it's advisable to seek assistance from investment experts or financial advisors. They can help you select the right funds based on your specific requirements and goals.
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