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When investors want to know which mutual fund to invest in, they ask the obvious question, 'Which one should I invest in?' As an answer, they are looking for the name of the one fund that is 'the best one'. But actually, it's the wrong question, or at least, that's the wrong question to start with. If you start with that question and expect an answer to those terms, then there's practically no chance of getting the right answer.
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Instead, the right question is 'What type of fund should I invest in'? Choosing a mutual fund is not a bottom-up activity but a top-down one. In other words, you should pick the fund that suits you the best; that matches your risk profile and your time horizon. Only after you know the answer to them can you move on to the specifics of which fund to choose.
For example, suppose you are putting aside a certain sum of money from your monthly income for your retirement, which is around 20 years away. In such a case, an equity fund is your best option. The period is long enough for the volatility of the equity markets to even out. What's more, you are likely to earn inflation-beating returns in the long run.
A fixed-income fund, meanwhile, would be most unsuitable. In a high-inflation environment like India, fixed-income options rarely beat inflation and your money effectively becomes less over the years. As such, your money would hardly grow over time.
Conversely, if you want to invest for just one or two years, fixed-income funds become a better option, as their primary goal is to preserve your investment. An equity fund, on the other hand, would be risky because equity can be volatile over a short period of time.
To sum up, don't chase the 'best-performing fund'. Review your risk profile and time horizon first. Depending on that, identify the 'right' fund.
Also read:
The inflation solution
How to choose a mutual fund
This article was originally published on April 10, 2018, and last updated on August 19, 2024.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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