Vasant G Hegde CFA & former banker, presently teaching at Manipal Academy of Higher Education, Bengaluru
As equities begin to draw more retail investors each day, there are those who rely on tips from friends and influencers to directly invest in the market and then there are some who choose the mutual fund route. But picking the right path from an array of over 2,000 schemes in the market can be equally daunting. This too can be independently done with due diligence or it can be outsourced to professionals. So, here’s a ready reckoner on how to pick the right mutual fund scheme.
Investor needs
The first step is identifying your financial goals, be it building a corpus for retirement, saving for your child’s education or marriage, or saving for a down payment for a home loan. These goals have different investment horizons and risk tolerance. The longer the time horizon higher will be your risk tolerance. Then again, your needs could vary between putting away money for long term appreciation, getting periodic income from the investment or using a short term instrument with liquidity, while protecting the capital.
Picking the right fund category
Typically, for long-term capital appreciation you can choose between flexicap funds that allow fund managers to invest in companies across market caps or on a high risk appetite you could look at small cap funds. For short-term investment you can park your money in liquid funds or consider arbitrage funds that leverage the price anomalies between cash markets and futures & options. For periodical income there are options such as income distribution cum withdrawal (IDCW)-pay out. If your objective is to get tax benefits go for equity-linked saving schemes with 3-year lock-in period.
What is most important though is to segregate your core portfolio from satellite ones, with the former addressing your long-term goals. The latter can take advantage of short-term market movements such as sector funds (when the business cycle favours them) or gilt funds at the peak of interest rate cycle.
Other parameters
When zeroing in on a scheme, you need to also weigh in aspects such as performance over a period, assets under management, reputation of the fund house etc. It also pays to understand the risk-return hierarchy among different categories of mutual funds. The Securities and Exchange Board of India has mandated labelling of products through riskometer, which has six levels of risk. It is also advisable not to chase past returns. Finally, thorough research never goes to waste.