Which is the best mutual fund for your risk profile? Should you invest in equity or debt? If equity, then should it be large-cap, midcap or smallcap? Let's learn all in this article!
In my previous article, I explained what mutual funds are, how are they categorised and how can one invest in them. I explained that one should check before starting their journey into mutual funds. If you haven't read it yet, I recommend you to go through that before reading this article. Click on the link below to read it.
Which mutual fund is best as per your risk profile?
As discussed in my last article, there are broadly two types of mutual funds - one that invests in equities and the other one that invests in debt assets. The confusion starts when you need to decide on which category of mutual funds should you start with. Do not worry if you are in a similar situation. Even I was in a similar situation a couple of years ago when I was in the initial stages of my investment journey.
Before investing in any fund ask yourself the following questions-
1. What are your goals?
This is one of the biggest issues with the newbie investors. They do not know what their financial goals are. Your goal should be more or less one among the following-
Preserving your money: This means you want to preserve your money from getting slowly consumed by inflation. If you want to know more about inflation, click here. This does not include making money. It is to simply preserve what you have.
Increasing your net worth: This means you are here just for increasing your net worth. You do not care what happens to your investment in short term, you want to see yourself richer in the long term i.e. 10 or 15 years down the lane.
If your goal is to preserve money, go for the debt funds. They generally generate between 5 to 7% returns per year which happens to be slightly more than what fixed deposits offer while if your goal is to increase your net worth, close your eyes and invest in the equities.
2. What is your risk appetite?
Does not matter where you are investing- be it the stock market or mutual funds or real estate, there are risks attached to it. There is a lot of chance that the asset you are investing in might underperform due to the company not performing well or maybe due to some government regulations or some other reason.
The risky the asset you are investing in, the better the returns are going to be and vice versa. Debt will hardly ever match the returns of equities and saying so, you will not be losing a huge amount of your capital in debt as compared to equities.
So now if you are someone who does not want to take any risk at all, mutual funds are not something you should be looking towards. Fixed deposit is what is meant for you. You will not lose any money but you won't be making any as well. Currently, fixed deposits hardly provide 5-6% returns per year.
If you are someone who wants to take minimal risks, go for the debt funds. You might lose some insignificant amount of money but you can make around 6-7% returns per year.
If you love taking risks, you do not care if you are at loss for a couple of months or a year, go for the equities. And within the equity class, the risk profiles are in the order of small-cap > mid-cap> large-cap. It is so because the large-cap funds invest in the top 100 companies of India while the mid-cap funds invest in the next 150 big companies while small-caps invest in small startups. The huge business firms are unlikely to go bankrupt and saying so they are so huge that their scope of becoming even bigger is quite low. Hence, large-cap won't be generating as many returns as the mid or small-cap.
3. Where are you investing your hard-earned money?
There are over 2000 mutual fund schemes running in the country. But does every large-cap fund make more or less the same amount of returns? No, it does not work that way. It depends on how well the fund manager uses your money and invests it on your behalf. You would definitely not like to invest in a fund that keeps on changing its fund manager every couple of years. Similarly, you would also not want to invest in a fund that in itself is not financially sound. For example - Company X runs a mutual fund scheme but the company in itself is under a huge debt, which showcases the inefficiency of the company to handle its revenue.
Now, you would be wondering how can you get information on who is the manager of the mutual fund scheme and how many times have the mutual fund house changed its managers. For this reason, I use a platform known as "Groww. " It is not sponsored. I have been using Groww to track and make investments in mutual fund schemes and I have no issues with them. You can use any platform of your choice.
If you are planning to open an account using Groww and invest in mutual funds, you can use my referral link, through it both of us can get ₹100 deposited in our account when you activate your account on Groww. It is a win-win situation.
With that, we have reached the end of the article. I hope you learned something new. Consider giving a like and share it among your peers. To get notified of new articles, sign up to the NerdyTree.
Let me know which category of mutual funds is suitable for you.