How are you all? Whenever people plan to start their investment in mutual funds, their very first question to the financial advisor is, “Tell me about the top-performing fund to invest?”. People often look for the top-performing mutual funds of the year or the top mutual funds from each AMC (Asset Management Company) and move forward to invest in these funds, but the question is, are the top-performing funds the best funds for all? Is it the right decision to invest in a fund just because it is a top performer of the current market? And if the top funds are not the right choice to invest then why financial planners prepare the list of top-performing funds?
Well, articles related to top-performing mutual funds, are written only to communicate about the performance of the fund. Now let us come to the question, top fund or right fund? Well, the very first thing one must understand that the market is not consistent, it fluctuates and so fluctuates funds’ performance, basically, it’s not always necessary that the fund that gave the best results last year, would be the market leader the next year also.
Every investor has different needs for investing, different goals for which they invest, similarly, each kind of fund scheme has different objectives of investment. When one plans to invest in a fund, they need to understand the objectives of the fund, also they should tally their investment objectives with funds objectives, if they match, the fund is the right fund for their investment.
Choosing the right mutual fund depends on multiple factors, some of which I am discussing here, read them to know, how to judge which fund is right for you.
It is much important to decide the investment tenure before investors start to choose a fund to invest. Different investors have different investment tenure and the choice of mutual funds is mainly based on the investment horizon. Like if investors want to invest for 5 years or more, Equity mutual funds are the best choice for them because the time period is enough for the returns to neutralize the effects of market volatility. If an investor has an investment horizon between 3-5 years, the Hybrid Mutual fund is the best bet for him, and if the investor has an investment horizon in between 1 month to 3 years then debt funds are the best to invest. This is because they do not fluctuate much and are less risky compared to equity funds.
Risk Holding Capacity
Different mutual fund schemes are associated with different risk holdings, and investors are advised to choose a mutual fund scheme that completely stands on their risk tolerating capacity. Like investors who are risk-averse, for them, debt fund is the right choice, which is low-risk funds, and at the same time, returns are also low than compared to Equity funds. Equity funds are the right choice for investors who can carry a high risk in their investment, and also these funds have the highest return among all funds. A person with a medium appetite to risk can stick to balanced funds.
The time at which the investor starts to invest in mutual funds for their goals also determines, which type of fund is right for their investment. Like if an investor plan investing in mutual funds for his retirement in his early 20’s, then he has approx. 30 -35 years to invest, thus he must be taking more risk as he has fewer responsibilities on his shoulders and can take risk and bear loss if any, and as they can bear risk, their investment portfolio will have a maximum part in Equity mutual funds. If an investor plans for his retirement in his 50’s, he has very little time and he can’t afford much risk, thus his investment portfolio will have only 40-50% equity.
Whether the investor is new to the investment sector or an experience holder also determines the choice of funds. A beginner who is less habituated to market fluctuations will get scared seeing a 5% loss in the portfolio and hence will not be willing to take the risk even if he/she can afford to, where on the other hand, a person who is experienced of market fluctuations and has been investing for a long time, will not panic with a 5% drop in the portfolio and will be willing to take the risk if needed.
Every Investor Is Unique, And Unique Are Their Needs
Every investor is unique and hence the way of choosing funds is unique to every investor. Mutual funds are the best way for any investor whether new or experienced, to build a corpus for their goals. For new investors with low-risk appetite and a minimum of 7 years of investment tenure, they can invest in Equity funds for their most important goals, like child education, to get the best returns. They shouldn’t be worrying about the risk in equity funds as they have the benefit of long investment tenure, and still, if they are worried about the risk then large-cap Equity funds are the best choice for them as they are the least risky equity funds.
New investors who have investment tenure between 3-5 years, they are advised to invest in Hybrid funds. Hybrid funds are popular as a perfect blend of both equities and debt funds! These kinds of funds invest in both, debt instruments and equities to achieve maximum diversification and assured returns, also they are associated with medium risk, so they are best suitable for new investors.
New Investors with a short investment horizon say from 1-3 years invest in short term bond funds which are the least risky funds. They give better returns and are also tax-efficient than FD (Fixed Deposits).
Exit or Redeem Your Fund When You Achieve Your Target.
Markets have unexpected events that turn the whole story upside down, maybe the fund that is giving a positive return may start giving negative return and if you redeem at this time, ultimately you will lose. So basically, like you follow a strategy to invest in mutual funds, you should follow a strategy to redeem them also. 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 you are unable to set a target to achieve, then follow the percentage, the market expects to be a good return, that is around 15-20%, this percentage return is considered good from a mutual fund investment in India.
Above factors are the parameter, that helps an investor choose the right fund for the investor, that completely stands on the conditions of the investor. So, if you are planning to invest in a mutual fund, analyze these parameters and then pick up the right fund that best suits your investment objective, this will help you accumulate a good return.
Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).