Here is a comprehensive guide on how to choose a good mutual fund, that aligns with your investment goals and risk tolerance.
Finding the right mutual fund can be a challenging task given the vast number of options available. Here are some key factors to consider when choosing a mutual fund.
Table of Contents
How to Choose a Good Mutual Fund
Diversify Your Investments
If you prefer a more complex investment strategy, you can consider investing in multiple fund segments such as flexicap, large and midcap, and smallcap funds. However, it is essential to periodically review and rebalance your portfolio to ensure it remains in line with your desired asset allocation. Investing in various categories can be confusing and may have tax implications. Alternatively, you can opt for flexicap funds, which invest in companies of different market values (smallcap, midcap, largecap).
These funds typically allocate 70-75% of their investments to largecap schemes, while the remainder goes to midcap and smallcap schemes. By investing in two to three flexicap schemes, you can benefit from the larger allocation to largecap companies without needing to select largecap funds separately. For those willing to take on more risk, allocating 10-15% of investments to mid and small caps in addition to flexicap funds can potentially yield higher returns.
Define Your Investment Goals
Before investing, it is crucial to identify your goals. If your objective is to build long-term wealth, equity schemes should be your focus. On the other hand, if you desire regular income, fixed income schemes might be more suitable. Additionally, consider your risk tolerance. If you are comfortable with fluctuations in the value of your investments, equities can be a good fit. However, if you prioritize risk-free returns, the debt segment may be more appropriate. Remember that high-return instruments typically come with higher risk, so finding a balance between risk and return is important.
Investment Horizon and Liquidity
Evaluate how long you intend to stay invested and whether you anticipate any liquidity needs in the near future. Mutual funds are subject to market risks, particularly equity investments, which are generally recommended for a minimum investment horizon of five years. Taking these factors into account will help you select a suitable scheme that aligns with your investment timeline and liquidity requirements.
See: Building Rs. 1 Crore retirement corpus with Mutual funds
Consider Market Conditions
It is important to note that achieving a consistent 12% annual return is highly unlikely. Market corrections can lead to lower returns or even a decline in the value of your investment. If you have a one-year investment horizon and desire stable returns, traditional options like fixed deposits (FDs) should be considered. However, it is crucial to understand that these options may not provide the desired level of return.
In conclusion, selecting a suitable mutual fund requires careful consideration of various factors. Look beyond just returns and focus on diversification, investment goals, risk tolerance, investment horizon, liquidity needs, and market conditions. By taking these factors into account, you can make a more informed decision on how to choose a good mutual fund that aligns with your financial objectives.
