How to pick an appropriate mutual fund for yourself?

We all know the stock market is a great investment opportunity but still, people are afraid to invest their hard-earned money in the stock market due to the risk and volatility of the market. When it comes to reducing the risk and still getting good returns that can beat inflation, mutual funds are the answer.

Mutual funds are investment vehicles created by different asset management companies consisting of stock, bonds, and other securities. To put it in simple words When you deposit your money in any mutual fund scheme according to your future goals, the fund manager invests that money in stocks, bonds, debt instruments, etc. by analyzing the market and taking the risk factor in mind. AMC’s diversify the portfolio to reduce the risk.

There are multiple types of mutual funds available in the market which gives investors the benefit to choose the right plan for themselves according to their risk appetite, financial goals, and time horizon. In this article, we have put together everything you need to know for selecting the right mutual fund for yourself.

Types of mutual funds.

⚫ Funds based on maturity period.

1. Close-ended funds.
These funds come with a maturity date of 3 to 6 years. These funds are listed on the stock exchange and can be subscribed at the time of launch.

2. Open-ended funds.
These funds allow investors to enter and redeem the fund as per net assets value continuously These funds offer liquidity and flexibility in time.

3. Interval funds.
These funds are hybrid of open-ended and closed-ended funds; they are closed-ended funds that are not listed in the stock market.

⚫ Funds based on investments objective.

1. Equity funds
As the name suggests these funds invest money mainly in stocks. At least 65 % of an equity fund is invested in stocks. These funds give good long-term growth. Investors with high-risk appetites and long-term objectives can invest in these funds.

2. Debt funds.
These funds invest a big chunk of the money in fixed income securities like bonds, corporate debentures, government securities, and money market instruments. Risk is comparatively low in this type of fund.

3. Balanced funds.
These funds are a hybrid of equity funds and debt funds. They invest their money 60:40 in equity and debt respectively. This fund aims at capital growth as well as stability in returns.

4. GILT funds
Gilt funds invest in government securities they do not carry any credit risk but it comes with risk in fluctuations of interest rates.

5. Money market funds
Liquidity, capital preservation, and moderate-income are what money market funds offer. These funds invest in short-term investments like Treasury bills, certificates of deposits, commercial paper for less than 91 days.

⚫ Other funds.

1. Tax saving funds / equity-linked saving scheme.
These funds are created under the income tax act and are specially designed to save tax. These funds invest primarily in equity and carry high risks. There is a lock-in period of 3 years for these funds.

2. Index funds.
These funds invest in stock exchange indexes like nifty 50 or Sensex. For example, a nifty 50 index fund invests in all 50 companies of nifty 50. These funds are great for beginners who have no or less knowledge of mutual funds.

3. Sector-specific funds.
Sector-specific funds invest In multiple companies of the same industry. The growth of these funds depends on the industry growth. Risk is comparatively higher as there is a lack of diversification.

Now you must be thinking about how to select the right mutual fund for yourself when there are so many options.

How to pick an appropriate mutual fund for yourself.
Selecting the right mutual fund plan for yourself is very significant as that fund should hold the potential to fulfill your purpose for this investment.

Following are the things you should keep in mind while selecting the right mutual fund for yourself.

1. The time horizon for your investment.

Whenever you decide to invest your money, significantly, you know the purpose and the time horizon for that particular investment. If you want to invest for retirement then you can invest in equity funds which will give you the optimum returns in the long term. On the other hand, if you want to invest to buy a car in the next 4 to 5 years you will have to invest some amount in the liquid fund as it is less volatile and will protect capital in the short term.

2. Risk appetite.

Knowing your risk appetite plays a very important role in investing in mutual funds. If you are someone who can bear the volatility and the constant changes in your portfolio then you can go for equity funds. If you or someone doesn’t want to take much risk and earn average returns then you can go for debt funds or hybrid funds. Risk management is a different topic altogether but an individual can invest in equity funds for the long term as they will give you maximum returns.

3. Knowledge and experience in the market.

If you have just started investing in mutual funds then you should invest in the options like index funds. This investment doesn’t require much analysis as it compounds your money along with the index like nifty and Sensex. If you are an experienced investor then you may choose to do your analysis and invest in appropriate funds.

4. You may also decide to go with the trends.

The mutual fund industry is rapidly growing so the funds aren’t just limited up to equity or debt funds. There are many new-age mutual funds also available in the market. Some mutual funds invest only in the initial public offerings as we all know how hard it can be to get the IPO. Some mutual funds also invest in different asset classes like equity, bond, and gold which offer diversity. So if you don’t mind experimenting a little then you can go for these newly launched funds.

5. Selecting a fund house.

In the above points, we discussed selecting a type of mutual fund but at this point, we are going to analyze how to select the fund house. Multiple fund houses issue all types of mutual funds so while selecting the fund house you have to analyze the records, fund manager performance as well as charges on different mutual fund schemes.

That was all you needed to know about how to select the right mutual fund for yourself. To sum it up, know the purpose, time horizon, your risk appetite and choose accordingly the right one for you. Before investing, always remember to consider these factors and keep investing in mutual funds as mutual funds “Sahi hai”.

Originally published at https://www.selfgrowth.com.