Mutual fund market has witnessed terrific growth in the past few years in India. If you believe that it’s time for you too to start building a mutual fund portfolio, we have a few tips to help you pick the best funds.
“How to select the best mutual fund?” is probably the most common question which every new investor wants an answer for. While there is no shortage of information on the internet, the reality is that you might not be able to find the right answer. When it comes to investing in mutual funds and building a portfolio full of excellent funds, it is essential to know that there cannot be a ‘one-size-fits-all’ approach applicable here.
There are several factors like your risk appetite, age, financial objective, investment horizon, etc. that needs to be taken into consideration for selecting the right fund. So, rather than providing the best recommendations, we give you the information with the help of which you’ll be able to select funds as per your needs.
- Investment Goal
Every investment needs to have an objective. With mutual fund investment, you might want to save for your child’s education, save for your retirement, buy a house or a car, or plan a family vacation. The goals can be different for every investor.
To keep up with the needs of different investors, there are different types of mutual funds. For instance, there are equity funds for long-term goals, balanced and medium-term debt funds for medium-term goals, and highly liquid short-term debt funds for short-term goals. Understand your objective before you start picking a fund.
- How Good are You with Taking a Risk?
Just like every other asset class, mutual funds too, carry risk. But the amount of risk significantly varies between different types of funds. While equity funds are known to be the riskiest, debt funds carry minimal risk.
Once you know the objective of your investment, understand your risk appetite. Avoid choosing a fund that doesn’t suit your risk tolerance as such.
- Your Age
Even your age has a significant impact on your selection choices. If you are young and have just started earning, you have more time for your investment to work as compared to someone who is in their 40s or 50s. If you are in your 20s or 30s, aggressive investment in mutual fund is a choice for you but not for an investor who is retired or is about to retire.
In general, you can invest aggressively when you are young but should aim for low risk and stable returns as you age.
- Fund Performance
With your investment objective, risk appetite, and age checked off the list; now you can start browsing different types of mutual funds. Know that there are more than 5,000 mutual fund schemes in India but thanks to the factors mentioned above, you should be able to filter out most of the schemes that don’t suit you.
Funds can be selected on the basis of the fund performance. Rather than simply choosing the top performing fund in the last quarter, focus on the long-term performance of the fund. The returns should be consistent. It is not very uncommon for a fund to deliver terrific returns in one quarter or a year but struggle in the next.
- Diversification is the Key
Even if you know a risky equity fund is what suits you best, do not make the mistake of adding multiple such funds to your portfolio. Your portfolio should be a combination of different types of funds to make sure that if a particular type of fund is unable to deliver the expected returns, the other funds will balance things out.
Diversify smartly and pick a few best mutual funds in India to create a winning portfolio.
Now that you know how to build a mutual fund portfolio, it’s time to put all this information to work. And don’t forget to consider professional help if you are still confused with all the different funds available.
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