Mutual Fund Course

How to choose the right mutual fund: A two-step guide

Here, we tell you which type of mutual funds suit you the best

How to choose the right mutual fund: A two-step guideAnand Kumar

dhanak हिंदी में भी पढ़ें read-in-hindi

Even though mutual funds greatly simplify the task of equity (stock) investing - as you read in the previous chapter - choosing the right mutual fund can be pretty tricky.

And especially if it is your first mutual fund.

Choosing the first fund can make or break your investment journey because one bad choice may discourage you from investing in the future.

But worry not. We are here to help you pick the right mutual fund.

The plan

Step 1: Select the fund category

Don't get stressed by looking at the length of this chapter. We are simply laying down different scenarios for you.

All you need to do is see which case study is similar to your situation.

Case 1: If you are new to equity and tax-saving is not a goal

What we recommend: Aggressive hybrid fund (for long-term wealth creation).

What they do: These funds invest majorly in equity and some portion in debt.

Why we recommend them: They are suitable for first-time investors, as the debt portion helps cushion the fall a pure equity fund usually witnesses when a market becomes negative.

This plays an important psychological role in helping you stay the course and not exit the fund in a panic, which is the most crucial aspect at the beginning of an investment journey.

Here is the list of top-rated aggressive hybrid funds

Case 2: If you are new to equity and want to save tax

What we recommend: Tax-saving mutual funds. Also known as equity-linked savings scheme (ELSS)

What they do: An all-equity mutual fund, they build wealth in the long run and provide tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

Why we recommend them: What's not to like about them? They grow your money and save tax, both at the same time.

These funds come with a three-year lock-in period, though. In other words, you can only withdraw your money after three years.

But this is actually suitable for you to stay invested. And as we know by now, the longer you stay invested, the greater is the chance for your money to grow.

Here is the list of top-rated ELSS funds

Case 3: If you have experience of equity investing and wealth creation is the primary goal

What we recommend: Flexi-cap funds

What they do: An all-equity mutual fund, they have complete flexibility in choosing stocks, unlike most other equity funds.

Why we recommend them: Since these funds can invest in large/mid/small-cap companies, you get exposure to what your fund manager believes are the best stocks in the market.

Here is the list of top-rated flexi-cap funds

That's all! There is no need to get lost in the maze of various mutual fund options.

You can pick a fund from either of the three categories mentioned above (depending on your objective) from our list of top-rated mutual funds, further simplifying your fund selection job.

Purely a quantitative exercise, these ratings are based on funds' long-term risk-adjusted returns relative to other funds and, therefore, reward those with a proven track record of performance.

How to choose the right mutual fund: A two-step guideAprajita Anushree

Step 2: Select the right mutual fund from the category

The funds we have mentioned on our list are the top-rated ones.

You don't have to torture yourself by going all over the internet to find the best fund.

In any case, most platforms that sell mutual funds use our star-rating system.

However, it would be best if you also did your homework. Make sure you avoid funds that:

  • Have recently seen a change in their fund manager (as this makes their past performance irrelevant).
  • Have a very high expense ratio compared to other funds in the category. (High expense ratio eats into your overall return).

Over time, you will learn many other things to up-skill your fund selection approach, but you don't have to know everything now.

It's okay to be slow; it's more important to be consistent. Because it is consistency that makes you successful in life.

In the next chapter, we show how to make your first mutual fund transaction.

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