Mutual funds are now a popular choice for growing wealth as more people turn to them for investment. However, it can be tricky to understand mutual funds since there are many options to choose from. To understand which mutual fund is right for you, let’s look at the different types as well as tips on how on choosing the right fund for you.
Step 1: List-down your financial goals
Before choosing which mutual fund to invest in, understand your goal and motive. When you have a clear goal in mind, it will be easier to pick which type of fund suits you.
- Short-term goals (1-3 years)
If you want to save up for a vacation or build an emergency fund, choose a fund that offers low risk. Debt mutual funds are a good choice. This is because they keep your money safe and give you steady returns.
- Long-term goals (5+ years)
If you are looking at bigger goals like retirement or buying a house, then equity mutual funds are a great option. They can be unpredictable in the short term but over time they grow well.
- Tax savings
If you want to save money on taxes while making investments look at ELSS (Equity Linked Savings Scheme). It features a three-year lock-in period and provides tax benefits under Section 80C. This helps your money to grow.
Step 2: Types of mutual funds
There are different types of mutual funds and each cater to a different type of investor.
- Equity mutual funds
These funds invest in company stocks, so their value can rise and fall. But over time they have the potential for high returns. They’re best for long-term investors who can handle market ups and downs.
- Debt mutual funds
Debt funds invest your money in fixed income securities like government bonds and corporate debt. These funds offer steady returns with minimal risk. If you prefer stability over high returns or need early access to the money, debt mutual funds are a great choice.
- Hybrid mutual funds
Hybrid funds give you a mix of equity and debt. Their approach is a balance of risk and returns. If you are looking for moderate growth without significant fluctuations, hybrid mutual funds are a flexible option.
Step 3: Evaluate your risk tolerance
It is important to understand your risk appetite as it makes it easier to choose the right investment. Will you be able to handle big ups and downs or do you prefer a safer option? Higher returns mean higher risk, so it’s all about balance. When you know your risk level, you’ll stay calm during market swings and stick with your investment for the long run.
Step 4: Check fund performances and cost
Before you invest, compare various funds with the help of a mutual fund calculator to get an estimate of your returns. Make sure it matches your investment needs. Here is what to check:
- Historical performance
Check the past 3, 5, and 10-year returns to see how consistency of the fund. A strong track record over time can indicate stability but also consider market conditions during those periods.
- Expense ratio
The expense ratio is an important factor to consider because it directly has an impact on your returns. A lower expense ratio is better as higher costs can affect your earnings over time. Always compare funds to make sure you’re not paying more than necessary.
- Assets under management (AUM)
A higher AUM simply means more people trust the fund. This makes it a safer choice for anyone.
A mutual fund calculator can help you compare funds and understand how much you can earn.
Step 5: Should you choose SIP or lumpsum?
One big question you might face is whether to invest through SIPs or go with a lump sum.
- SIP: SIP is a great choice if you’re just starting out. You invest a fixed amount every month which lowers your risk and keeps things steady.
- Lumpsum: Lumpsum works well if you have a big amount ready and want to invest when the market is down. It can help you make the most of market dips and get higher returns.
Step 6: Choosing the best mutual fund for your investment
Now that you understand mutual funds, their types, and how to pick the right one, making a choice becomes easier. If you’re just starting, it’s a good idea to begin with a small investment. This keeps the risk low.
If you’re unsure or need guidance reach out to an investment advisor or institution for help with your mutual fund decisions.
