How to Choose the right mutual fund: for beginners?

Invest choices differ based on goals and risk capacities. A new investor tends to attract towards safer investment, like traditional savings instruments but a balanced portfolio demands diversification. Although equity as an asset class can generate far better reasonable returns, not all investors have knowledge or time to invest in the equity markets. This is where mutual funds come into the picture.

A mutual fund combines funds coming in from different investors in diversified securities like equities, government securities, corporate bonds etc. A professional fund manager takes calls so that investors do not have to take extra time and effort to monitor the market. Generally, a well-managed fund generates relatively better returns than fixed-income securities.

Different types of Mutual Funds

For novice investors, it is imperative to understand the distinction among a multitude of mutual fund types. Mutual funds differ based on structure, asset class, risk levels, goals, investment horizon.

For example, equity mutual funds tend to invest in company stocks. The returns of these funds are relatively better than others, but they could also be riskier than others. Debt mutual funds invest in fixed income securities like corporate bonds, commercial papers, g-sec, etc., providing relatively stable but lower returns. The third type of funds which are hybrid funds that seek to combine the best of both asset classes, i.e. equity and debt.

Another type of mutual funds can be ELSS or Equity Linked Savings Scheme, which are considered tax savers. ELSS funds are eligible for tax deduction under section 80C of the Income Tax Act, 1961. They have a lock-in period of 3 years.

Understanding the differences in mutual funds can help you choose the right mutual fund to invest.

How to choose a mutual fund?

Over 44 AMCs are registered in India offering more than 1100 open-ended schemes. This is huge to pool to choose from, and the paradox of choice may confuse many. 

How does an investor pick the right mutual fund? Investors sometimes rely on ongoing market trends or take advice from friends or relatives. This is not the right way to choose a fund.

Before you choose a mutual fund to invest, ask yourself these three questions:

1. What is your financial goal?

Define your financial goal. Clearly defined targets or goals make investment tracking easier. Your goal may be to go on a world tour, save for retirement or buy a house. You can estimate the amount you will require to reach your goal and start investing accordingly.

2. What is the time you want to dedicate to achieve this goal?

A long-term investment horizon means you can take more risks. Retirement can be a long term goal. Equity mutual funds are a good option, but if you have lesser time save 3-5 years, then your risk-taking ability will be lower for this you can choose debt or conservative equity funds like equity savings or balanced advantage funds.

3. Is your goal negotiable?

There are some goals which are time-bound. For example, you may be able to pushback buying a house by a few years. However, a child’s education cannot be compromised. If your goal is non-negotiable, you can think about investing in low-risk fund.

How to invest in mutual funds?

After arriving at your financial goal, risk capacity, and investment horizon, you are in a better position to decide on the type of fund you want to invest.

If you want more clarity on choosing the right mutual fund simple drop a mail at ask@fisdom.com and our team will help you with the right product.

Conclusion:

Mutual funds are convenient and effective investment vehicles that can fulfill several financial goals. The key to making the right choice is to understand your individual needs and make a decision accordingly.

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