How to select the best Mutual Fund?
6 months ago
Looking for the best mutual funds? Read this article, there may be some changes in your thoughts. First of all, when we are talking about the best, something that is best in your opinion may not be the best in mine. Therefore, ‘what is best’ is a kind of subjective question.
We are talking about the best mutual funds, it may vary from person to person according to one’s needs, goals, income, and many other factors that can affect the decision of investment. Let’s understand this thing with an example-
Your cousin purchases a black shirt which perfectly fits him and looks good on him and he says “yeah, this shirt is the best and you should also purchase it”. But the shirt does not fit you and black is not the color you like. Now, will that shirt satisfy your definition of being best? Obviously not because your need is different. That’s what the case with mutual funds. One mutual fund that is best for one person may not be best for the other.
So how would you know that which mutual fund is best for you?
Let’s try to answer your question:
Know about your goal
The goal, we are talking about is the financial goal here not any personal goal. That is the most fundamental concept which you need to understand before investing. You should know the basic need and goals because of which you want to invest in mutual funds. You need to consider your assets and liabilities and your current financial position. How much money you are ready to invest and assess the time you have to achieve that goal. And most important how much risk you are willing to take or how much risk is required to take.
Categorize your goals
Financial goals can be of three types-
- Short term financial goal – while categorizing financial goals, firstly you should consider your short term financial goals. The goals which you need to achieve in less than three years are included in short-term goals. These funds are those funds that you can use in times of emergency. These goals are achieved by ascertaining your expenses and creating a budget. It will help you to cut down your unnecessary expenses and be more devoted to your savings. For example- down payment of a vehicle, planning a trip for Europe, etc. For achieving these types of goals you cannot opt for risky assets as the time period is short.
- Medium-term financial goal – these are the second type of financial goal. Medium term goals are the goals that you need to achieve in a time frame of approximately three to seven years. For example- Buying a new car, paying off your student loan. For these types of goals, you can consider a mix of equity and debt funds.
- Long-term financial goal – long term financial goals are those goals for which you have approximately more than 7 years. These are the most important goals of your life. Example-
Saving money for retirement, accumulating money for a child’s marriage, etc. As there is more than enough time to achieve your goal you can consider investing in equity funds.
Analyse the option you have
As there are enough choices in mutual funds which may lead to confusion. Don’t just blindly invest because the fund is showing higher returns as it may involve the risk that might not be suitable for your risk appetite. There is a number of types of mutual funds such as sector funds, thematic funds, liquid funds, balanced funds, etc. Each type of mutual fund has its own advantage and disadvantage. For example, Gilt funds provide less return compared to equity funds but have less risk as compared to the same. So choosing the fund will be influenced by a number of factors such as risk, liquidity, return, time, income, etc. if you are unable to decide, you can take the advice of a Mutual financial advisor for this who will help you invest your money or can recommend you a specific investment that suits you.
Don’t try to underestimate the risk
One of the most important thing that you need to understand before you start investing is that there is a difference between what amount of risk you are willing to take, what amount of risk you are able to take, and what amount of risk you really need to take to achieve your financial goal. There is a balance that you need to maintain among them.
Taking risk more than your capacity is just letting your money go in vain. Nowadays, financial advisors perform risk profiling on the clients to assess their risk capacity, risk tolerance, and the risk required to take and maintain the balance among them.
Hence, it can be concluded that the best mutual fund is a myth because it totally depends on personal goals and other factors such as risk profile, time, income, etc. therefore, one should invest according to his need and financial goal.