Mutual funds are considered to be among the best investments by a lot of people. They bring in good returns to match your risk-taking ability, and in general, are pretty simple to invest in. Mutual funds give a lot of options to investors. One could invest a lump sum, or start a Systematic Investment Plan (SIP).There are a lot of mutual funds and obviously not all of them are for you.
Whether you’re looking for tax saving mutual funds, or growth-oriented mutual funds, a lot of people are torn in dilemma with just one question to ask – “What is the right mutual fund for me?!” Today, we intend to answer that question. Here’s how to determine which mutual fund suits you best.
Goal Identification and Risk Appetite
Mutual funds are tax saving investments, but that’s not their only purpose. One starts to invest in mutual funds with some financial goal in mind. These goals might either be specific, such as saving up for a wedding, or a vacation, etc., or could be generic, such as saving up for long-term plans. Either way, your goal is what gives you a hint as to the strategy you should follow when investing in equity funds.
The second thing that is the most important, is your risk appetite. Risk appetite can be defined as your risk-taking ability. Risk appetite depends on a lot of factors, such as age, financial goals, etc. Young people, below the age of 40 years have a better risk appetite than those older than 40. Financial goals play a major role too. If you’re saving up for your retirement, you don’t really want to take a high amount of risk. Even the best performing mutual funds go up and down, are you ready to take on turbulence?
When Should You Go for an Equity Mutual Fund?
There are no hard and fast rules, as to when you should start investing in equity mutual funds. However, here’s a rough guide. You should invest in equity mutual funds only if:
- You have long term financial goals.
- You have a moderate-to-high risk appetite or risk-taking ability.
- You have an investment horizon of more than five years.
Risk Appetite Plays a Major Role
It is to be noted that risk appetite is one of the major things affecting your choice of equity mutual funds. As a rough guide, here’s how you should choose an equity mutual fund based on your risk taking ability.
- If you’re a conservative investor, i.e. have a low risk appetite, it is better that you invest only in equity oriented balanced schemes, and large cap mutual fund schemes.
- If you consider yourself to be a moderate investor, i.e. have a moderate risk appetite, it is advised that you go for investments in either large cap or multi cap (diversified) mutual funds to better suit your financial goals.
- If you are an aggressive investor, i.e. have a high-to-very high-risk appetite, you should take advantage of that risk-taking ability by investing in midcap and small cap mutual fund schemes. If you’re a knowledgeable investor, you could also try sectoral schemes.
Diversified Portfolios and What You Should Keep in Mind
Ace investor Warren Buffet follows one golden rule of investments – Never keep all your eggs in the same basket. The same is true in the case of mutual funds. Your goal should be to create a diversified investment portfolio by investing in various mutual funds so that risk is nullified and returns are maximized.
However, you must keep your risk appetite in mind when creating a diversified portfolio. If you’re a conservative investor, it doesn’t make sense for you to invest in sectoral schemes just for sake of building a good portfolio. All in all, you must choose the schemes that fit your risk profile. Also, when adding a new scheme to your investment portfolio, ensure that it falls in line along with your other investments in its risk factor. If you aren’t sure about something, don’t do it.
Get in touch with the WealthApp financial advisor for better advice.