Types of Mutual Funds

When you go shopping, do you have a list of things in mind? You don’t go buying things randomly without need or purpose. Right? Similarly, it’s important to know for what purpose you wish to invest. In simple terms, define and prioritise your investing goals. Also, it’s equally important to quantify these goals i.e. how much amount you would need to achieve your goals. For example, for buying a car you may need 4-5lacs or you may want a monthly income of Rs.50,000 for your post retirement days.

Once you have identified and prioritised your goals, calculate the years or the time horizon required to achieve your goals. This will not only help you identify the amount you need to save every month to achieve your goals but also help in deciding the type of mutual fund you should choose to do your investments. A debt fund could be ideal for your near term goals and an equity fund could be apt for your long term goals.

Each of our goals becomes expensive with each passing year. It is important to determine the future cost of your goal by taking a realistic inflation rate into account as inflation eats into our savings every day. For example, if your child’s higher education costs Rs. 10 lacs in today’s terms and this goal is still 10years away then the future cost of your child’s higher education would be Rs.21.58 lacs assuming 8% annual inflation rate.

Every person has a different capacity to take risk hence the scheme you choose should also match your risk tolerance level. You can invest in equities if you can tolerate significant erosion in your investments in short term otherwise hybrid or debt funds with relatively less risk should be chosen. Factors like your age, income, expenses and nearness to goals also help determine your risk appetite. For example, a young investor planning for his retirement could invest in equity funds but should start shifting his money to debt funds once he approaches his retirement.

There are various mutual fund schemes available to cater to different needs of an investor. Based on your investment goal, time horizon and risk appetite you should choose the mutual fund scheme which best suits your profile. Prepare list of shortlisted schemes and options (growth or dividend) they offer. Also, ascertain the strategy you have to follow for example start a SIP in case of regular monthly investments or opt for STP in case lump sum amount needs to be invested in equity funds.

If you have enough time and expertise to understand the different types of mutual fund schemes available then you can do your own research and select the fund which will best suit your needs. There is plethora of easy to understand information available online for you. Or you could also take help of a mutual fund advisor. He will not only answer your queries about investments but also work with you to select the right mutual fund for you basis your individual profile.

It is important to be aware that all asset classes –equity, debt, gold etc do not move in the same direction at the same time hence it becomes crucial for you to diversify your investments across various asset classes. Time horizon and your risk appetite should be considered while deciding how much of your money should be in a particular asset. For a very short term goal, a liquid fund could be chosen whereas if you are a conservative investor with a long term goal, then you should invest in a mix of debt and equity i.e. a hybrid fund. Always remember not to put all your eggs in the same basket.