Choosing an Appropriate Mutual Fund

Mutual funds is nothing but a bag that can hold items like shares and fixed deposits.

The schemes that invest in shares are called as Equity Mutual Funds and schemes that invest in fixed deposits and its likes are called as Debt Funds. A mix of both is called as Hybrid Funds.

This is the level where you need to make the most important decision. The choice you need to make here is whether you should invest in equity funds or debt funds or a hybrid fund.

Remember, first thing you always need to do before deciding on the fund:

Determine time- By when you would require the money. If you require the money within 3 years call it as short-term. If you may require the money between 3-5 years call it as mid-term and anytime above 5 years call it as long-term.

Follow the simple thumb rule for mutual fund investment:

The investment is for short-term, then go for debt funds
The investment is mid-term, then go for hybrid funds
The investment is for long-term, then go for equity funds

The rationale behind this is as follows:

Debt funds provide safety of capital but the returns are relatively low. Investments that are for shorter period, priority is safety of capital over returns hence debt funds are preferred.

Equity funds give you scope to make higher returns provided they are invested for longer periods. For investments that are long-term, inflation is the major cause of worry. Equity funds have the power to blunt the effects of inflation.

Long-term goals

Equity mutual funds are further divided to cater to different segments of people.

Further, to identify the type of equity fund suitable to you:

Define-The purpose of the investment. If the purpose of the particular investment is to meet life goals, higher education, retirement, marriage, purchase of home, etc call it as core needs. If it is for general wealth creation call it as satellite needs.

To choose the appropriate equity fund to meet your long-term needs follow these simple rules:

In case you are investing for core needs then choose a diversified large cap fund or an index fund
In case you are investing for satellite needs then choose either a thematic or sector fund.

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