Mutual Fund Sahi Hai! – What to look for in Mutual Funds before investing?

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Yesterday after a long time I was watching TV and the occasion was nothing short of a festival as Indian Cricket Team was playing against Pakistan in Champions Trophy 2017.

Though the match turned out to be quite painful, I was pleasantly surprised by seeing the number of ads which are being run online by AMFI (Association of Mutual Funds of India) to educate common man (retail investor) about investing in Mutual Funds.It’s a great marketing strategy to occupy short ad spots and increase the frequency with which the ad appears, and this is what they seem to be doing, this will definitely go a long way in creating a recall value when any retail investor will think about investment.

The messaging in the ad was simple and was primarily aimed at addressing common misconception which people have about investing in Mutual Funds. For ex: that there will be lock-in or you need a very high amount to start investing or that returns in mutual funds are completely dependent on market fluctuations. A straight forward interpretation of these ads are that there is a mutual fund for everyone! and indeed there is.

In this blog post, we want to help you in selecting the mutual fund which suits you the best. This article is meant for people who are 1st time investors in Mutual Funds and If you want a more technical explanation on mutual funds you can refer to following blog: http://blog.finotrust.com/index.php/what-are-the-different-kinds-of-mutual-funds-and-where-do-they-invest/

Like any other investment, in Mutual Funds also the most important factor is how long do you want to invest your money i.e. how many days or months do you want to remain invested. There is also a second factor in Mutual Funds which is to denote how much risk you are willing to take on your investments, a risk is a factor of how much volatility you are willing to digest i.e. would you be okay with your principal amount reducing at times or not? If yes, how much reduction in Principal amount you are okay with i.e. 5%, 10% or 20%! This is called decision making on risk adjusted return. 

A simple rule of thumb is longer you want to remain invested, higher is your earning potential because if your investment horizon is high for ex: 3 years, you can easily invest in some medium risk equity schemes which though have volatility in short time but can generate heavy returns (20%+) in long term.

For the sake of simplicity let’s divide time horizon in 3 buckets –

a) Less than 1 Year

b) 1 Year – 3 Year

c) 3 Year+

and Risk in also 3 buckets with following definitions –

a) Low Risk – Do not want to see any volatility in investments

b) Medium Risk – Can see 5% decline in Principal amount and cannot digest more than that.

c) High Risk – Okay with 10-15% decline in Principal as long as there is an opportunity to earn high returns

One of the key decision in deciding the mutual fund scheme in which you should invest is to know the type of Mutual Fund it is or commonly known as “MF Classification”, following is a broad framework you can follow for selection –

S.No. Risk Time Horizon Type of Mutual Fund
1  

Low

Less than 1 Year  

Liquid/Ultra Short Term Debt/Arbitrage Funds

2 1 year – 3 Years
3 >3 Years
4  

Medium

Less than 1 Year Short or Medium Term Debt/Income Funds
5 1 year – 3 Years Long Term Debt/Income Funds
6 >3 Years Equity: Large Cap, Diversified
7  

High

Less than 1 Year Equity: Large Cap, Diversified
8 1 year – 3 Years Equity Multi Cap
9 >3 Years Equity Mid Cap, Small Cap

After you know the category you are investing in just look for the schemes which have historically given best performance in the time period you are looking for and invest in them. That’s it, it’s that simple!

Of course, if you do not want to take this headache of selecting which fund you should invest in, head over to FinoTrust.com, we have completely automated the process of fund selection and you will get all the schemes which suit your need. Just remember to use the filter on the left hand side to shortlist the schemes as per your need.

If you have ever booked a flight ticket online before, you will not find it difficult to invest via FinoTrust!

If you have any questions regarding your investments, Ask us here.

Author: Varun Gupta

Varun is the CEO of FinoTrust.com and FinoZen.

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