Choose the 'best' mutual fund for YOU

'Best fund' is a relative term. It varies for every individual and depends largely on their risk appetite, investment time frame and particular need. To choose the best fund for yourself, it is important to first identify the right type of mutual fund scheme.

Broadly, there are three types of mutual fund schemes - equity funds, fixed-income funds and hybrid funds. These are further divided into sub-categories.

• If you are investing for a long-term goal that is at least five years away, invest in an equity-oriented fund. A tax-saver fund or an aggressive hybrid fund is a good option for beginners who have never invested in equities before.

Equities are volatile over the short-term but it is important to stay invested during thin phases of the market to reap the long-term benefits. Tax-saving funds have a lock-in period of three years. The lock-in period ensures that the investor doesn't exit too soon out of fear when the market falls. On the other hand, aggressive hybrid funds invest about one-third of their portfolio in fixed-income which cushions the downfall when the market falls. This helps new investors withstand market falls.

• If you are an experienced investor and have invested in equities before, two good flexi-cap funds should be enough.
• On the other hand, if you would need the money before five years, say over the next two-three years, choose a fixed-income fund.
• If you are investing for immediate needs, then liquid funds are a better option.

Fixed-income funds invest in bonds and debt securities. They are less volatile and meant to invest for short-term goals. While there are different types of fixed-income funds, short-duration funds should be the choice in most cases.

Now, once you select the right fund category, compare the mutual fund schemes within that category and pick the one which has a decent performance track record. Do not go by the short-term performance and rather look at how the fund has done over long periods of time across different phases of the market. In case of a fixed-income fund, look at the credit quality of the bonds it holds. Look for a fund with high-quality papers. A fixed-income fund with lower quality papers may return more but carry additional risk.

To read more about what to check while comparing funds within the same category, read How to choose a mutual fund

A lot of work for you? Access our portfolio planner which recommends mutual fund schemes basis your need.

This article was originally published on April 14, 2022.