Mutual Funds are becoming an incredibly popular form of investment. Statistics pay testimony to their growing acceptance.
As of March 2017, total investments held in all Mutual Fund schemes in India stood at Rs. 17.55 lakh crore. This number has jumped three times since March 2012, when the assets under management (AUM) were at Rs. 5.87 lakh crore. More and more investors are drawn to Mutual Fund investments, since they offer solutions to every investment problem.
However, to the investor who has already decided to invest in a Mutual Fund, one problem remains: out of the thousands of schemes in the market, which ones does he pick?
We think that when your investment objective is clear, it becomes easy to shortlist the right investment instrument. We also think you must think of investments in terms of their tenure.
Here are some thoughts to help you make your Mutual Fund pick.
Short Term Investments
What is it? In investment terms, the “short term” is typically a period of 12 months or less.
What are examples of short term investments? An emergency fund to cover you during job loss, a down payment fund for buying a car, a fund for settling your loan.
How should your investment be? Since your investment horizon is small, you need your investment instrument to keep your money safe and not risk it. This is because you may need this instrument at any point in the immediate future, and cannot afford a corrosion of fund value linked to market volatility. Additionally, you need the instrument to generate conservative returns.
Which funds should you pick? You can pick short-term Debt Funds, Liquid Funds, and Debt Funds.
Pro tip: Give liquid funds a chance. Most Mutual Funds apply an exit load – typically, one percent – on the redemption of units held for less than one year. But Liquid Funds typically do not apply an exit load. This saves you money during an emergency redemption.
Medium Term Investments
What is it? This investment tenure can be between one year and three years.
What are examples of medium term investments? Creating a fund for setting up a business, creating a down payment fund for property purchase.
How should your investment be? Since your investment horizon is a little longer, it becomes possible for you to introduce a degree of risk. This will provide you marginally higher returns while ensuring safety of capital.
Which funds should you pick? If you are risk-averse, you can stick to Debt Fund categories such as long term Debt Funds. If you are curious about taking a risk, perhaps you may want a monthly income plan with a low degree of risk. These schemes invest 5 to 30% of your corpus in equity options and the rest in debt.
Pro tip: Use an SIP while investing with any degree of risk. This cushions you against market volatility and provides you opportunities to average your unit costs.
Long Term Investments
What is it? This investment tenure can be anything over three years.
What are examples of long term investments? Creating an education fund for your child, building a retirement corpus.
How should your investment be? Since your investment horizon could be as long as 30 or 40 years, you can take a much higher degree of risk and invest heavily in equity. Even in a falling market scenario, the long term affords you plenty of time to recover, average your costs, and generate high returns.
Which funds should you pick? For each long term investment goal, you can pick an equity Mutual Fund. If you are risk averse, you may want to invest in a balanced fund, which invests up to 65% of your corpus in equity and the rest in debt.
Pro tip: Use SIPs for better cost averaging. Remember to diversify your investments between various fund classes. Over the long term, large cap funds have proven to be the least volatile among Equity Funds. If you’d like to earn higher returns by taking higher risks, you may invest in a mix of mid and small cap funds, sectoral or thematic funds, international funds, gold funds and ETFs.
Finally, if you’ve identified your investment objectives and tenures, you should evaluate and shortlist your Mutual Funds. This you can do by studying such parameters as long term CAGR, expense ratio, comparisons with the benchmark, and the fund manager’s track record.
(The writer is CEO, BankBazaar.com)