For every need, there is a Mutual Fund!

Published On: 01-Sep-2017

BLURB: A single product cannot meet needs of every individual, thus we have different mutual funds for different needs.

When it comes to investing, needs of every investors may wary drastically. Few would wish to invest for shorter period and some would wish to invest for long-run. Similarly, few might wish to invest in low risk instruments while few might think otherwise. Want to invest as low as ` 500 or invest as high as ` 5 crore. Want to invest lumpsum one time or invest periodically using SIP. And the list goes on!

Whatever be the need, mutual funds have a product for every investment needs!

But what’s been a million dollar question for most of us is which mutual fund we should select for our needs! With over 5,000 odd funds, this task becomes even more difficult!

Don’t worry, let me tell you that nowadays, investing in a mutual fund is as simple as buying a mobile phone online. Let me tell you how. Let’s take an example:  You wish to buy a Smartphone, does that confuse you much?  Probably not that much! That’s because you have a checklist about the operating system, RAM and other features like camera and sound quality, screen size, price, etc you want to buy. Based on these, you select the best one that fits your need.

The same goes with Mutual Funds. Before buying a fund, you need to have a checklist about your financial goals, investment horizon and risk profile to shortlist a fund best suited and tailored to your needs.

So how can you make the right choices with ease?

The first step is to decide whether you want to lock your money with Close ended schemes that have fixed maturity period and can be bought only during the initial issue till the window closes or keep it liquid in Open ended schemes where one can enter and exit any time they want. 

The next step is to list down and prioritize your goals.

If you wish to invest for long term say more than 5 years, then Equities are the best bet. Equity funds invest predominantly in stocks and thus may be volatile in the short term. However, the risk of loss falls drastically over long term coupled with potential to beat inflation and generate superior tax free risk adjusted return.

Conversely, when your goal is in reach within short term say 1-3 years, safety of capital becomes a necessity over return potential; thus it is wise to opt for Debt funds at this time. These funds invest in debt-market instruments like bonds, government securities, debentures, etc and thus, carry relatively low risk return profile.

What if you want to return potential of equity and stability? If you are willing take a moderate risk, then balanced funds which invests around 65% of your money in equity and the rest in debt, may be the best alternative for medium term.

Once you know your debt-equity asset allocation based on your goals, the next step is to pick the specific fund within the debt or equity categories. 

If your objective is to save tax and also grow your wealth at the same time, invest in Equity Linked Savings Scheme or ELSS that has a lock of 3 years and can invest as low as ` 500.

Equity funds are further categorized based on market capitalisation of stocks.

One may select on basis of Market Cap like Large Cap invests in stock of well established companies with a market cap of above ` 25,000 cr while Midcap invests in stock of mid size companies with a market cap between ` 5,000 to ` 25,000 cr and Small Cap invests in not well known companies with market cap less than ` 5,000cr. Needless to say, as market cap decreases, the volatility increases. However, if you wish to invest across all of these market segments, select a diversified fund. Further there are specialised funds like sector funds (invests in specific sector of the economy), index funds (follows an index), etc to further diversify your portfolio.

Likewise, there are different types of debt mutual funds like liquid schemes wherein you can invest even for a day. For a period between 3 months to 1 year, you have short term funds. You can consider short-term bond funds for a 1-3 year horizon like Credit Opportunity Funds, Corporate Bond Funds, etc. For medium and long term period i.e. 3-5 years, invest in funds like Gilt Fund, Dynamic Bond Fund, Income funds, etc.

Once you have decided the schemes, the last step is to determine whether Growth option or Dividend option shall suit you? Dividend option works best for one who wishes to receive regular cash payouts from their investments while growth option helps to reap benefits of power of compounding since profits made by the scheme are invested back into it.

Now that you know different types of mutual funds, go ahead and select funds that meets your need and relax!