Are you thinking about investing in mutual funds? That is a smart move. Mutual funds offer a versatile and accessible way to grow your wealth, whether you are an experienced investor or just starting out. With the potential for high returns, expert management, and diversification across various assets, mutual funds can help you achieve your financial goals. However, the key is to choose the right mutual funds that fit your specific needs, whether those are centred around your financial goals, risk tolerance, or investment horizon.
Here’s a detailed guide to help you navigate the process and select a mutual fund for your financial goals.
Clearly define your financial goals
Different financial goals need different investment strategies. For example, long-term goals like retirement might benefit from equity funds, which have the potential of generating higher returns over time despite short-term market volatility. Conversely, if you are saving for a short-term goal like a vacation or an emergency fund, a debt/hybrid fund with lower risk might be more suitable.
Assess your risk tolerance
To create the best asset allocation for your portfolio, you first must analyse your risk tolerance and then invest in mutual funds strategically.
- Low risk: Debt funds and liquid funds, ideal for risk-averse investors
- Moderate risk: Hybrid funds, which combine both equities and bonds, are ideal for investors with a moderate risk tolerance
- High risk: Equity funds are geared towards those with a higher tolerance for volatility, seeking greater returns
Explore different fund categories and evaluate their track record
Options in mutual fund investments are numerous. There are equity funds, debt funds, hybrid funds, index funds, thematic/solution-oriented funds, etc. Look for funds that have consistently outperformed their benchmark indices over different time periods, especially during market downturns.
Try to avoid chasing funds that have delivered exceptional short-term returns, as these might not always be sustainable in the long run. Instead, focus on funds that have shown steady or profitable performance over a period of at least five years.
Check the fund manager’s and fund house’s track record
A skilled fund manager can make calculated decisions that significantly impact the returns of the fund. Research the fund manager’s track record, the number of years they have been with the fund, and their performance in different market conditions. Funds managed by an experienced manager and asset management companies are often more reliable, especially during market volatility.
Lump sum or Systematic Investment Plan (SIP)?
Lump sum investments can be beneficial when markets are low, as you have the potential to earn higher returns once the market rises. However, this approach requires a large sum of money and involves higher risk due to market volatility.
An SIP allows you to invest a fixed amount at regular intervals and spread your investment over time. This approach mitigates risk through rupee-cost averaging and takes advantage of market fluctuations. To see the future growth of your investments, you can use an SIP calculator available online. Simply input your monthly investment amount, expected rate of return, and investment duration to estimate the future value of your investments.
Review tax implications
Budget 2024 introduced significant changes to the taxation of mutual funds. For equity mutual funds, the Long-Term Capital Gains (LTCG) tax rate has been standardised at 12.5%. The Short-Term Capital Gains (STCG) tax on equity funds has been increased to 20%. Debt funds, however, continue to follow the same taxation rules. Regardless of the holding period, gains will be treated as short-term and taxed at the applicable income tax slab rates.
Understanding the tax implications can help you choose a fund that aligns with your tax planning strategies and maximises your post-tax returns.
Conclusion
To choose the right mutual fund, it is critical to understand your goals, risk tolerance, and investment tenure. By considering factors like the fund’s performance, expense ratio, fund manager’s expertise, the option of SIPs, and tax implications, you can make a calculated decision. Remember, investing in mutual funds is not just about chasing returns but about creating a balanced, diversified portfolio that can grow steadily over time.