So much is written about Mutual Funds in the newspapers on a daily basis, the advertisements too say “Mutual Funds sahi hai”. Yes that’s true, provided you know which fund ‘sahi’ is for you.
With so many mutual fund schemes on the shelf, choosing that one fund which will work for you and help achieve your goal can be quite a challenging and daunting task. We tend to take the easy way out and go by our friend’s choice or recommendation. Or decide based on emails, advertisements, etc. Nothing wrong in that and you can asking or checking around. Because remember, everyone doesn’t have the same goals, timelines or even same kind of money to invest. So your investment path could well be different that of your friend or acquaintance.
So here are a couple of simple and easy to understand (or so I think) points to consider while choosing the ‘sahi’ Mutual fund for yourself.
Firstly understand this, each MF product or scheme as some call it (though I don’t like the word) is meant for a certain specific purpose, has to be invested for a certain period in order to achieve that purpose and lastly carries a specific risk. Each MF product is generally classified in specific category that kind of defines it.
For e.g. At the base level, there are Cash Management /Liquid Funds/Money Market Funds, meant for short time frames e.g. 15 days – 1 month, less than 3 months. These funds are meant for preserving your capital at the same time earning a return slightly higher than your savings account. The risk in this is low.
At the highest level, there are Equity Funds, these are investments meant for long time frames e.g. 5 years +. These funds are for growth of your capital invested, needless to say the risk in these investments is high.
In between the above two fund types, are a mix of Liquid/debt/income funds and equity funds and the risk escalates as the investments move towards complete equity. For simplicity sake, I have put it down in a tabular format.
|Fund Type||Purpose||Risk||Time period|
|Equity Funds/Stocks||Capital Growth or Appreciation||High||Long Term|
|Balanced Funds/Bonds||Capital Growth/Appreciation & Current Income||Moderately High||Medium to Long Term|
|Gilt Funds/Bonds/Debentures||Income /Marginal Capital||Moderate||Medium to Long Term|
|Income Funds/ Short Term Bond Funds||Income||Moderately Low||Short to Medium Term|
|Money market /Liquid / Short Term Deposits||Capital Conservation||Low||Very short to Short Term|
I had in an earlier article written that, For Investing, all you need to know is yourself, All you need to know for investing is Yourself!. So before you make any investment choice, ask yourself;
- What am I investing for?
- For how long can I keep this investment?
- How much risk can I take? Can I afford to lose out money?
Secondly look up the Product Label that each MF product is supposed have in the Offer Documents. This label is just like the nutritional facts label that you will see on food items. It is supposed to have
- Nature of scheme such as to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term).
- A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (Equity/Debt).
- Level of risk, depicted by colour code boxes
The above table and the label should help in choose your path and lead you to your destination.