Mutual funds can be categorized as different types based on asset class, structure, risk, investment goals and so on. It is up to you as an investor to choose a fund suitable to your goals. How do we choose a fund that gives the best returns?
The answer is that nobody has the right answer to it. While we cannot tell you which mutual fund will give the maximum returns, we can give you some parameters to compare scales.
On the basis of asset value, the major kinds of mutual funds that are usually talked about are Equity Funds, Debt Funds and Hybrid Funds.
Equity Funds
Also known as stock funds, these are funds that invest in shares of companies. The shares are called equities, hence the name equity fund. They are long term high-risk, high-returns funds, where the risk is comparatively high, but so are the returns. Their value is assessed by the fluctuations in share prices. Profit and loss are calculated correspondingly.
If your goal is high returns that come along with high risk of loss, then equity funds are suitable for you. They are capable of generating higher returns in comparison to other low-risk investments.
Debt Funds
Debt funds are low-risk investments that can generate small income consistently. Debt funds invest in bonds and securities that come with a fixed interest rate. Fixed-income funds are less risky than equity funds, but also generate lower returns. This is ideal if you want to get a steady but fixed rate of return.
Hybrid Funds
A combination of both equities and fixed income investments, hybrid funds offer the best of both worlds. This also ensures higher diversification in your investments.
These are simply three types of mutual funds. There are different Asset Management companies that operate in each of these and many other kinds of mutual funds.
Again, Which One Should You Choose?
It depends on several factors. More importantly, it depends on what you wish for yourself, and how far you are willing to go. Given below are some of the things that you should keep in mind before investing:
- Goal
Whenever you invest, it is important that you know what you are hoping to achieve. Gain clarity on what your end goal is. Having that clarity will keep you focused. With the ups and downs, and the wide variety of options available, it is easy to lose track. How you define your financial goals will determine how your life will be years down the line.
- Risk
Your risk appetite measures how much risk you are willing to take to achieve your goals. Different mutual funds come with different levels of risk. It is up to you to evaluate risks for your investments. Again, not having a well-defined goal may make you reckless.
Risk Tolerance is one’s ability to withstand the possibility of losing money. The markets can be highly volatile. A successful investor will have to maintain calm and patience even on the verge of heavy loss.
- Duration
The next thing that you need to be certain about is the duration of your objective. It may be short-term, long-term or mid-term. A short term investment may span a year or two, whereas a long-term investment may be longer than five years. Mid-term lies in-between extending across three to five years. Knowing your time frame helps a lot in choosing the right assets and funds to invest. It also helps you to figure out how you want to invest: as a lump sum or SIP.
Go to a SIP Calculator online which will help you calculate what is the suitable SIP for your goal.
There are also other factors such as previous performance of the fund, expense ratio, the experience and expertise of fund managers and so on that you need to check before investing.
No matter what your goals are, there are a few things one should always keep in mind while investing in mutual funds. It is important for an investor to know how volatile the market can be. The highs and the lows are part of the cycle. However, developing a keen eye for when is a good time to buy or sell is the way to successful investing.
