4 ways to Choose a Best mutual fund for you
Choosing a best mutual fund could be a challenging and tricky. Because there are more than 8000 Schemes available to pick from.
Let us take a look at 5 factors which help decide on mutual fund categories.
Pick a mutual fund based on risk profile
Risk profile is the ability and willingness to bear risk. A conservative investor must consider large-cap funds. They generate wealth, slowly and steadily over the long term. These are steady performers which pay regular dividends.
In recent times large-caps have performed very well over the last year, even as mid-caps and small-caps are going through a severe correction. A volatile market has forced investors to seek solace in large-cap funds.
“Mid-caps and small-caps are for investors with high risk tolerance. They outperform large-caps in a bull market but could crash in a bear market. Small-caps are for investors with high risk appetite, seeking very high returns,” he said
Invest based on time horizon
Time horizon is the time you can stay invested in a mutual fund. Invest in equity mutual funds for the long-term of at least 5-7 years. The past equity trends have shown that 10-year returns of small-caps are higher than large-cap funds over the same period. Small-caps are good performers even over a 5-year period. The trick of making money in any mutual fund is staying invested for the long-term. Invest in small-caps over large-caps and even mid-caps, if you have a time horizon of 10 years or more.
Small-caps and mid-caps are not suitable for everyone
Investing in small-caps is not just the volatility. Good research cuts down risk in small-caps, which is beyond the scope of first-timers. “It would be wise for first-timers to stick to large-caps. If you are not capable of ‘Do It Yourself’ investing, stay away from mid-caps and small-caps. They are not meant for everyone. A first-timer who invests in a small-cap and sees the portfolio erode by 15-20% would panic and exit the scheme, never reaching financial goals,”.
Strategic Asset Allocation – ( Diversification )
Diversification is not investing in two mid-caps and two small-caps. Diversify across categories. First-timers could invest in one large-cap, mid-cap and small-cap. One fund category that stands out is multi-cap funds. They are equity diversified funds which invest in Companies of different market capitalization.
Multi-cap funds have been exceptional performers over the past year. They don’t face restrictions vis-à-vis Company size. A large-cap has to invest only in large-cap Companies and a small-cap in small-cap companies. “Multi-cap funds have the opportunity of investing across markets. Invest in multi-caps if you are a moderate risk-taker looking for long-term wealth creation.
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