By Dheeraj Agrawal, Communication Professional
Investing in mutual funds is “right” but the big question is which mutual fund? Many old investors too often ask the question whether the schemes of their mutual fund portfolio are correct or not. Among thousands of schemes of dozens of mutual fund companies, choosing the right scheme for yourself is as difficult as choosing the right mobile phone in your budget. But we are going to make the selection of mutual fund schemes easier for you. All you have to do is, before finalizing the scheme, find the answers to these five questions which we have prepared for you.
1) What is your investment goal?
First of all, find the answer to the question of why you are making this investment because every investment has a goal in financial planning. It may be that you want to invest to go abroad or to buy a car or a house. Your financial goals may also include the cost of higher education for children or to save money for retirement. Or do you want to invest in mutual funds just to save tax. Remember that the duration of an investment may vary for each financial goal. And this will decide whether your investment in mutual funds should be for short term or for long term.
2) How long you can invest?
When you have set your investment target then it will be easy for you to find out how long you have to invest in mutual funds. If your plan is to make provisions for the down payment for your home, then it is possible that you will remain in investment for 3 or 5 years. But if you are planning to raise money for retirement, then the investment period can be 10, 15, 20 years or even more according to your age. The decision of which mutual fund is right for you will largely depend on the answer to this question, how long you can remain in your investment.
3) How much risk can you afford to invest?
When you keep your investment period longer, you can also take a bit more risk on it. But if the investment period is short then it would not be wise to take risks. It is also necessary to remember that the financial goal of investment will be achieved only when your invested capital is safe and regular returns are received. There are many types of mutual funds and the risk varies. For example, risk is higher in equity mutual funds and less in debt mutual funds. Sector mutual funds are also more risky in equities, while balanced mutual funds carry less risk. The choice of the right mutual fund for you will depend on the extent to which you are comfortable taking risk in your investment. For example, if you are 30-35 years old and are investing for retirement, then you can take more risk. But if you are 50-55 years old, then it will not be right for you to take risk.
4) Which category of mutual fund is right for you?
By now you must have decided how long you can invest and how much risk you can take. To make mutual fund selection a little easier, we are giving you some tips:
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If you can invest for 5 years or more and can take more risk, then you choose any equity mutual fund category. These can be index funds or diversified mutual funds.
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If you can invest for 5 years or more but cannot take much risk, then you choose the equity-oriented hybrid mutual fund category. Hybrid funds are also called balanced funds.
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If you want to invest for less than 5 years then debt oriented hybrid mutual funds will be right for you or pure debt mutual funds.
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If you want to invest for the purpose of saving tax, then you have to choose Equity Linked Savings Scheme i.e. ELSS Fund. These are equity funds in which your investment is locked-in for 3 years and you can get a tax rebate on investments up to Rs 1.5 lakh annually.
5) How will you reach the right scheme of mutual fund?
After finalizing the category of mutual funds, now it is the turn to finalize the scheme. For this, you can examine the scheme on some parameters such as past performance, its asset size, expense ratio, rating and performance in a volatile market. Although the previous performance is not a guarantee that the scheme will give good returns in the future, it gives an idea whether the fund meets your expectations or not. Also remember that as the asset size of a fund scheme increases, its expense ratio decreases. And lowering the expense ratio means better returns. Therefore, choose a scheme whose asset size is at least Rs. 700-800 crores.
We not only hope but believe that with the help of the aforementioned 5 mantras, you will be able to hit the bull’s eye. So, we wish all of you a very happy investing.
