How to choose a Mutual Fund?

By BankBazaar | April 26, 2011

There are a lot of steps that must be considered before going ahead and investing directly into a Mutual Funds or heeding the advice of your fund manager. It is no harm to do a little research of the avenues where you will put your savings and pray for them to grow. Although, it can be a little time consuming, ignoring any step can lead to undesirable future consequences.

Choose the type of fund you want to invest in:

The type of fund is best defined at the first level by its debt vs equity allocation. Within equity, the type is best defined by the size of the companies whose stocks the fund typically invests in. Map the time frame of your investment to a type of asset.

Invest in debt for short-term investments and in equity for long-term investments:

Short term refers to anything between 1-3 years and long term, more than 3 years. If you intend to buy a car by the end of the next 2 years, investing in debt instruments where the risk is low and returns are guaranteed life FDs, short term Mutual funds etc, will be a better option. This will enable you to develop a savings linked expenditure approach wherein your chances of getting into a wrong kind of debt like a car loan or home loan are significantly reduced.

For periods beyond 3 years, choose equity. Equity funds are classified by the capitalization of the companies in whose stocks they generally invest in. Here, the tradeoff is on risk. Link the goal of buying a house after 5-6 years to a particular investment made in the equities.

Decide the size cap of your Fund:

It is very important to list out all the alternatives of investing in mutual funds caps of various sizes. The pros and cons of each cap, small cap, mid-cap, large cap etc need to analyzed. Mid-cap and small-cap focused funds can deliver higher returns but can also result in huge losses. Larger-cap stocks moderate both.

Which fund to choose?

After the above queries have been sorted out, choosing the type of fund that you should be investing in is an important decision. Investing in an unsuitable type, can cause problems, even if the actual fund may be the best one within that type. After a complete analysis of the funds available, make a wise decision depending on your appetitive for risk.

Although you might be associated to fund house with a reliable fund manager, choosing the right type of funds, id basically do-it yourself activity. Investing in funds is risky, but profitable if you have targeted the right funds to invest. One must realize that it is not possible to time the markets. Once you choose your fund and proceed with the investments, sit back and watch your money grow.

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