Mutual funds have been proven to be a very successful way to begin one’s investment journey. As an investor, it’s the best investment avenue to begin your journey without having to know much about equity markets, indexes or even how the economy is performing.
But as a new working individual I personally struggled with picking the right fund. And not surprisingly I, like many of you, would google “Best mutual funds for highest returns”. But is that really the right way to go about a personalized suggestive option?
Of course not!
But don’t worry, you don’t have to go through the same struggle I did.
How to select right mutual funds?
Investments are not a ‘One size fits all’ type of assets. They are supposed to be personalized based on your expectations, needs and comfort levels. Hence, these are some of the points that you should keep in mind while selecting a suitable fund for yourself:
1. Your Personal Objective – Be mindful of what you are trying to achieve with your investment. Whether it’s a foreseeable major expense like your wedding, a future trip abroad, an emergency fund, your child’s education, your retirement, or even something for your family, make sure you have a clear reason for this investment.
This objective will help you decide 2 things
a) A timeline – What your investment’s duration should be.
b) How risky/ risk-free should you be in order to choose the fund.
2. Risk Appetite- Risk is a very interesting point here. People between the ages of 22 to 28 are generally ‘risk seekers’. To state the obvious, these are people who in general have lesser debt, lower obligations and have the bandwidth to take on additional risk.
There after funds that contribute to over 85 to 90% of the funds AUM* to just equity. This makes the fund riskier but it is able to generate higher returns too. (Remember, an investor always looks for additional compensation when he takes more risk. Hence, a high risk to high reward ratio is seen amongst different funds)
Now, for people over the age of 29, Risk becomes a critical factor. People in this age bracket are generally more cautious about their finances because of responsibilities, debt and other things.For them a fund that has a good balance of both Equity and Debt is preferrable. 20 – 35% of AUM may be dedicated to Debt funds making the fund safer & more stable.
3. A Suitable Fund – Now that you have a goal in mind with the required time line and risk appetite, look for funds that help you reach the required returns percentage.
How do you do that? Well, an easy way is to compare the returns percentage that the fund has made over the required tenure (for eg say 3 years) to the returns made by the Indian Indexes such as Nifty & Sensex. If your fund beats or equates that return percentage, you are good to go.
For Example – My 3-year goal is to buy a car for X amount of rupees. My money has to grow at a continuous interest rate of 15%. I would look for a fund that has been consistently performing well and one that gives me a return of at least 20% CAGR*.
Types of Funds:
- Equity Schemes – These are funds that are high risk and have a high return potential. These are ideal for investors in their prime earning stage, looking to build a portfolio with superior returns in the long term.
- Money Market Funds – These are funds that invest in short term debt instruments, giving a sustainable and stable return. These types of funds are suitable for investors with low risk who are looking to park their surplus over a short term.
- Fixed Income or Debt Funds – These funds would have majority of their investment in debt instruments such as government securities (G-sec), bonds and debentures. Ideal for low-risk investors who are looking for a steady income.
- Balanced and Hybrid Funds – Funds that have a good mix of both Equity and debt. The allocation of the AUM would keep changing based on how the sectors are performing in the current market sentiment. Since it’s a combination, the returns would be moderate to high depending on the allocation.
So do your research to identify the right mutual funds that match with your expectations, needs and comfort levels.
If you find this whole process overwhelming, you can always hire an Advisor who can help you with this!
Glossary
AUM – Asset Under Management means the total value of the fund being invested by the fund house.
CAGR – Compounded annual growth rate is the annualized average rate of revenue growth between two given years, assuming growth takes place at an exponentially compounded rate.
NAV – The performance of a particular scheme of a mutual fund is denoted by NAV (Net asset value). NAV is the market value of securities held by the scheme.