scorecardresearch5 things to keep in mind to choose the right mutual fund for yourself

5 things to keep in mind to choose the right mutual fund for yourself

Updated: 23 Dec 2022, 08:16 AM IST

Choosing the right mutual funds is not easy. It is a different ballgame altogether that involves myriad factors and decisions backed by data-based permutations and combinations.

Choosing the right mutual fund is not easy.

Choosing the right mutual fund is not easy.

Beating the impact of inflation and creating the much-desired corpus is not possible by only putting money into traditional investment opportunities. There is an ardent need for people to now invest in stock markets that would not only yield them market-linked returns but also ensure adequate corpus accumulation. However, a wrong selection of mutual funds has caused many investors to either book losses or earn abysmal profits, not in sync with their financial goals. This also explains the need to invest in the right mutual funds to achieve financial goals in time.

A lot depends on why you are investing in the first place. You may be investing to secure funds for your post-retirement phase or any other goal in life like buying property, children’s higher education, marriage, etc. This explains choice of funds or why many investors opt for funds investing in particular kinds of stocks. Also, different mutual funds have distinct risk profiles, thus, explaining the idea behind investing in equities, debt, hybrid or fixed-income plans. Apart, your risk appetite tells a lot about how long you wish to stay invested or how frequently you hop from one fund investment to the other.

Focus on financial goals

Selecting the right mutual funds can be tough. There is no haphazard approach involved which means that you must be aware of why you are investing in a particular fund. To start with, your financial goals define your choice. This translates into how much earnings you are anticipating for this fund and for what purpose. For example, if you are a 28-year-old mutual fund investor looking to set aside for retirement at the age of 60, you must be willing to invest consistently over the next 32 years. However, this also means that you would be minting money from equity investments till you turn 50 years old, post which, you may shift your money to a safer haven, viz., balanced advantage funds or debt funds depending again on how, again, you view your finances in the future. 

However, goal planning is not enough. You must be ready with your choice of mutual funds and ensure that you stay invested for the predetermined period. Planning to be a long-term investor is different from being a long-term investor. Let the market not deceive you with its constant ups and downs. You must be steadfast with your investments considering how the purchasing power of money depletes with time, thus, prompting you to earn more to beat the devaluation of your savings.

Risk appetite

It’s one thing to be brave on paper and another to show courage in the market. The stock market has struck down some of the fiercest bulls to the ground and raised alert bears to an enviable status. Taking risks does not have anything to do with how much money you expect to earn from the market but with your ability to stick to your guns even when the financial outcome is averse to your expectations. Some people have a higher risk appetite than others. They continue to invest through systematic investment plans (SIPs) irrespective of how the market behaves. They are more focused on their goals than their journey, thus, explaining their consistency in investments. Age factor has a lot to do with risk appetite. Investors must always assume a low risk in their outlook toward investments after reaching their financial goals or as they approach their retirement age.

Investment horizon

You cannot wish to turn your investments into a corpus of a crore if you have started investing too late in life. Similarly, you might not want to explore equities unless you have a long investment horizon. Though statistics highlight how equities have pushed many people’s fortunes to admirable heights, it pays to put some money in debt and hybrid instruments, especially, if you are nearing retirement or have a short investment horizon. Certain types of debt funds, such as overnight funds, liquid funds, ultra-short duration funds, and so on, are appropriate for very short investment tenures (less than one year). As a result, choose mutual funds based on your investment objectives.

Why do you want to invest?

Are you aiming for a corpus or a regular income source? Choose equity funds for capital appreciation and overnight or liquid funds to earn regular income. You may choose between different equity funds that earn interest beyond fixed deposits while allowing you to withdraw a fixed sum systematically every month. You may also choose dividend yield funds that allow you to benefit from the dividend income over a period. Many investors are confused between the dividend and growth options, thus, prompting them to seek professional advice.

Expense ratios 

You must focus on savings at every step, which is why ignoring the expense ratio of a fund may cost you dearly. Index funds are passive mutual funds, thus, explaining their low expense ratios. However, actively managed mutual funds charge more while justifying how their fund managers manage to create alpha returns in the long run. While in some cases, it may be true, the high expense ratios charged by some asset management companies must not fool you into misconstruing them as more effective than others.

There may be myriad other factors affecting your choice of a mutual fund(s). Why you choose to put money in one fund above the other is something that you must explain yourself better than others. Seek advice but do not blindly fall for what social media influencers say. In the end, the choice of the right mutual fund boils down to how much you expect from your investments.

Investors can invest in ELSS mutual funds to save income tax.
First Published: 23 Dec 2022, 08:16 AM IST