So, you know that mutual fund investments are beneficial but do not know which mutual fund to invest in? That is quite natural given the several types of mutual funds that exist out there and the numerous different mutual fund schemes under each type. Hence, you need a strategic and sound parameter basis which you can narrow down on the mutual fund you should choose to invest in. And the best parameter to do this is your investment objective or goal.
When you first think of a financial goal you want to meet or the reason you want to invest in mutual funds, that will act as the guiding light in helping you choose the right mutual fund. That is because every financial goal comes with a certain timeframe and amount that you need, and every mutual fund scheme comes with its specific risk-return profile. Once you know your investment objective, you can align your goal with your mutual fund investment. And here’s how you can do that.
Choosing a mutual fund based on your investment objective
First things first. Think of a goal you want to meet. It can be buying a car, renovating your home, going on a vacation to a country on your bucket list, saving for retirement, funding your children’s education and or wedding, starting your business, etc. Now, keeping that goal in mind, answer the following questions.
- How much money do you require?
Different goals will require different amounts of money. For instance, for funding a vacation you may need Rs 5 lakh while you may want to build a retirement corpus of Rs 5 crore. While it may be difficult to know the exact amount for every goal, you may be able to estimate the approximate amount. This, along with how long you have to amass this amount, will help you understand the kind of mutual fund returns you need.
- In what timeline do you need to meet the goal?
The time for which you can stay invested is important because it directly impacts your returns. It also dictates the kind of mutual fund you should invest in. For instance, if you have a short-term goal like going on a vacation in six months, then investing in certain debt mutual funds such as liquid funds would be beneficial. That’s because debt funds tend to focus on capital preservation and are more liquid. However, if you have a long-term goal like building a retirement corpus, you can invest in equity mutual funds that focus on capital appreciation. Also, equity investments are ideal for the long term as these give your investment enough time to iron out short-term market volatility and hedge market risk.
- What is your risk tolerance like?
You also need to consider what amount of risk you can and are willing to take when you invest in mutual funds. If you have a low risk tolerance, then you may want to stay away from high-risk mutual fund schemes such as thematic equity funds, small-cap funds, etc. Your risk tolerance primarily depends on factors such as your age, income, liabilities, number of dependents, personality type, and existing investment portfolio.
In addition to these three factors, you also need to consider the kind of taxation on the fund, the past performance of the fund, and the mode through which you will invest – lump sum or a Systematic Investment Plan (SIP). All these factors together will help you determine which is the right mutual fund scheme for you. Usually, the official website of the mutual fund house will have all the important information regarding each scheme available. This includes the risk level, the recommended investment horizon, the asset allocation, the fund’s investment objective, and more. You can see if this aligns with your investment objective and strategy and make an informed decision.