Every Investor is Unique
Every investor is unique and hence the way of choosing funds is unique to every investor. Mutual funds are a way to enter financial markets for the inexperienced. For first-time investors with long years investment horizon (7 years and more), investing for critical goals can go with equity for the best returns. Even if their risk appetite is low, equity will be the best choice as they have the advantage of the time horizon. If they are still worried about the risk in their portfolio, large-cap funds are the best choice for them as they are the least risky equity funds.
But if the investor is investing for the first time and has a short investment horizon (1-3 years) and are investing for critical goals can invest in short-term bond funds which are the least risky funds. They give better returns and are tax-efficient than FDs.
Hybrid funds are highly recommended for first-time investors who want to test the financial markets. They come with better returns than debt funds with medium risk and also have the benefits from equity and debt in their portfolio. An investment horizon of 3-5 years is ideal for these funds. Once the investor is comfortable with investing in these funds he can move to more risky equity funds.
Debt and equity both have funds with different levels of risk. Liquid, short and medium-term funds are the least risky funds in the debt category. For equity, the risk is the most in small-cap followed by the mid-cap, multi-cap, and large-cap funds. Each has an investment horizon of 5+ years. But the longer the investor stays invested the better the returns. But how long is long enough?
Have an Exit Strategy
Every business comes up with an exit plan. Hence it is important for each individual investor to have a plan too. What is more dangerous than loss-making is the greediness to earn more than required. Markets take unexpected turns for unexpected events and one might end up losing all that has been earned in the process. Hence it’s better to have a plan for redeeming the investments. Have a target amount or target return percentage set before the investment is done. Once the target is reached redeeming the investments is better than seeing it all vanish within moments. If setting a target percentage is difficult then stick to what the market expects to be a good return. Somewhere around 15-20% return is considered good from a mutual fund investment in India. Don’t be greedy and stick to the target always.
Understand that each investor is unique and choose the right fund than the best fund. Pick funds based on your age, investment horizon, and risk tolerance. What might be best for one person may not be the best for others
“Being unique is better than being perfect” – Unknown
Many people have this idea that there is a ‘best’ fund out there that they should buy. If you look at performance and other criteria, there really are funds that may be the best. But should you be buying them? Not necessarily. Buying the right fund is like buying a new pair of jeans. The colors and the patterns matter but you need to find the one that fits you the best. To find your right fit among mutual funds, you need to ask the questions that only you can answer.
