How to choose Mutual Fund?

Mutual Funds are perfect financial instruments for creating wealth only if we choose the right one. In India we have around 44 Asset Management Companies offering more than 9000 funds in various asset classes such as equity, Debt, gold, etc. Too many choices make it more confusing for common investors to pick up the exact fund which can cater to their needs properly. But with the help of internet solution is at your door step if you have the questions in your mind. We have prepared a set of questions to make this tedious task a bit easier for you, so just ask yourself and act accordingly.

What is your Investment objective? The first task is to identify the investment objective. Each person has his own purpose behind the investment, viz. marriage, child’s education, retirement etc. Each of these financial goals has distinct requirement. For example, if you are at age of 25 and you want to build your retirement corpus, then you should choose an equity based mutual fund which is high risk & high return product. The risk or volatility will automatically get smoothed out as you will remain invested for longer time period & return on investment will be much higher. On the other hand if your child is 10 years old and you need to invest for his or her higher studies then you can go with hybrid or balanced funds having moderate risk or debt funds with minimal risk. Hence pick a mutual fund, allot it a particular financial goal & invest accordingly.
How long you want to stay invested or Time Horizon? The duration for which you are willing to keep your money invested will determine the type of fund you must choose. The more time you stay invested the more return you get. It’s will have compounding effect on your investment. For example; if you want to buy a car (short-term goal), you can settle for a balanced fund which is mixture of equity & debt. Because for short period of time, investing in debt will reduce the risk of loosing money but at the same time equity will try to maximize your return. On contrary, pure equity mutual funds can be chosen with longer time horizon for higher returns.
How much liquidity you need in your investment? There are basically two types of mutual funds, one is open ended in which you can invest whenever you like & make withdrawal anytime. Another is close ended fund which has a lock in period and open for a certain period of time to make investment or withdrawal. It is recommended to invest in close ended fund for long term financial goals like buying a house, child’s education and whereas open ended mutual funds are suitable for short term.
What is your desired return & risk appetite? As earlier stated, there are various asset class. Every asset class has different risk & return characteristics. Equity has high risk & high return whereas Debt has low risk & low return. Those who are aggressive opt for equities as share price fluctuations increase their profit margin but conservative investors always stay out of the fluctuations and invest in nearly fixed-return investments. That is why aggressive investors gain more than the conservative ones but for this aggressive investors have to experience the jolts of volatility which are avoided by the non-equity investors.

These queries are enough to have a clear idea of an investor’s requirements so that he or she can make the best investment choice in mutual funds. But please note that the answers will vary from person to person, therefore, ask yourself and choose on the basis of your own needs. For learning the process of Mutual Fund investment read our article “Mutual Funds Decoded”

Published by Sweta Sharma

I am a Research Associate working in an Equity Research Company having knowledge and experience in Equity Fundamental research.

One thought on “How to choose Mutual Fund?

  1. But still options are too much and make investor confuse.. Like which fund house, which equity schemes etc… What is the way to get out of it?


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