The Right Fund vs Best Mutual Fund
Every one of us wants the best things in the world.
The best clothes, shoes, cars and the list goes on. Seeking the best things is
fine in all the other areas but not when it comes to selecting a mutual fund to
invest.
It is easy to get swayed by the best mutual fund
that is giving eyeball popping returns in the last six months. But is it a good
option to go for this best mutual fund? The answer is, it depends.
It depends on whether this best fund is also the
right fund for you. The right fund will vary from individual to individual.
There are a number of factors that need to be considered to arrive at the right
fund. By the right fund, we mean the most appropriate fund for a particular
investor. The appropriate fund for someone who wants to stay invested for 10
years will vary from a person who wants to stay invested for just 10
months.
The investment horizon, risk-taking capacity, age,
urgency of the goal are some of the factors that will help to decide whether
the fund is right for you or not.
So, let’s understand what will be the right fund
for you based on these factors:
Investment horizon:Investment
horizon is the time that you would want to remain invested. Also, your
investment horizon for your different goals will be different. You may want to
stay invested for 10 years to buy a house, which may not be the same for a
short term goal. If your investment horizon is short, then you can invest in a
mutual fund that carries low risk. Liquid fund to short term debt funds is
ideal investment options if your investment horizon is less than three
years.
Risk-taking capacity: Not
everyone can take the same level of risk. A young professional who has recently
started working may not be willing to take a higher risk as the person may have
no prior experience in investing in equities. On the other hand, a person who
has been investing in equities will have a higher risk-taking capacity as
he/she understands the risk associated with investing in equities. The person
will be better emotionally prepared to handle the volatility in the stock
market, than someone who hasn`t invested in equities.
Age:Age is also a
crucial factor which helps to decide the right fund. The financial needs of
individuals belonging to different age groups will be different. A person in
their 20s has a goal of buying a bike or travelling the world, while a person
in their late 50s may want to create a sustainable monthly source of income.
Hence, the route taken by the two individuals will be different. For the person
in 20s, equity funds may be the best option to fulfil their long term financial
goals. On the other hand, the person who is going to be retired, setting up a
Systematic Withdrawal Plan from a debt fund with extremely low risk will help
him to take care of his needs after retirement.
The urgency of the goal: We
may have a lot of financial goals but there are a few goals that we can’t
compromise. These goals are most likely to be short term goals. Planning for
these goals will be different than the goals that are not very urgent. A higher
allocation of the investment corpus may go towards fulfilling the urgent goals.
Also, to make sure that you earn higher returns with moderate risk, you may
have to invest in two or more mutual fund schemes. Depending on the time
horizon of your goals, it may be a mix of equity and debt funds. Your financial
advisor will be able to help you out with the detailed planning.
Conclusion:The factors such as
time horizon, risk taking capacity, age and urgency of the goal should not be
considered in silos. These factors are dependent on each other. It is always
prudent to seat and discuss all these criteria with your financial advisor, who
considering all these can help you to choose the right scheme for you.
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