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

For e.g.

mf product label

The above table and the label should help in choose your path and lead you to your destination.