How to Choose Best Mutual Funds for Investments: Mutual Funds Guide for Beginners

If I tell you that I can only save 10,000 rupees every month but a few years later Instead of ten thousand I want a crore, you would say “I am joking”. Because I cannot make Rs. 1 crore from only Rs. 10,000. But my friend, if you invest 10, 000 rupees every month for the next twenty years in an asset that gives you just 13% annualised returns, then after twenty years your investment will become more than one crore.

We Know “Mutual Funds are good”. But the question here is

• Which mutual fund is good for me?
• Which mutual fund is good for you?

This we don’t always know. In this article, we’ll talk about five points you have to keep in mind while choosing the right mutual fund. And at the end of this artilce I’ll tell you something interesting. if you have deposited money in bank or FD, there is a type of mutual fund in which if you invest will give you higher returns than bank and the risk is negligible.

How we do start our investment journey?

• Normally in India people like me would start investing with encouragement from friends. Like my friend called me one day and said “I have invested in mutual funds, and it gives good returns, You too should invest.” So the first trigger point is your peers.
• Secondly, how do we choose our mutual funds? We go to a random website take a look at its past returns, where the returns are high, we invest there. Is this the correct way of investing? No, friends. This is not the correct way at all. Because, yes, by looking at the past returns you get to know its past performance. But if you are investing today, you get returns in the upcoming days. And through research it is not difficult to find good mutual funds.

I am going to tell you those five factors using which you can choose the best mutual funds. GOAL – When we are young, we have academic goals. When we go to college, we have career goals. When we are working, even then we have goals for future. But friends, why do we forget to have goals when it comes to investing? Where goals are very important, we don’t remember our goals and invest anywhere. So whenever you invest in a mutual fund, the most important is your financial goal. Which you would like to fulfill through your investment. And the remaining factors that I will tell you about, they are all based on your goal. Goal could be anything, it may be small or big. For example you want to buy a car, after a few years you want to buy a house, you want money for your children’s marriage or you want to retire after a few years. Or it is also possible that you don’t have a goal. What do you do then? You will have to invest your money somewhere so that your wealth would grow. This is called wealth creation.

So first of all, before you invest decide what your goal is. And then decide how to invest. After goal, the other factors are duration and risk. If I talk about duration and risk these revolve around goal. These three factors are interlinked. How? I will tell you. Assume that I got a job today. I wish to own a car after three years. For that I will need ten lakh rupees. So buying a car became my goal. The ten lakh rupees is my first financial goal. When do I want to buy a car? After three years. So the three years is my duration. Now you must be thinking I told you about goal and duration but not about risk. That’s because I think risk is a very important topic which needs to be discussed in detail. So, friends, risk is, when we invest money somewhere, the chances of its value going lower instead of higher. It means, if you invest 100 rupees, there is a chance that instead of 105, it could go down to 95. The chances of it going down and how much you can bear it is risk. And risk is personal for everyone. Friends, risk and returns are linked to each other. If you want more returns, you will have to take more risk. On the other hand, if you take more risk you need not necessarily get more returns. Come on, let’s discuss some goals in detail. Which mutual fund is suitable for which goal?

• Let’s talk about the first goal. I want to buy a car after 3 years. The duration of my goal is 3 years. Which mutual fund should I choose for 3 years? Friends, always remember this rule: if you are investing for less than 3 years try to invest more in debt funds. The risk is less in debt funds. Although the returns is also less, but not very much. But if you want to invest for a short period of time, you should invest in debt funds. You want to buy a car after 3-4 years for 6 lacs rupees. From now, every month you will have to invest 15,000. I told you, if your investment horizon is less than 3 or 4 years, then you should invest in debt funds. So I have taken the average returns of debt funds as just 7%. If you invest, from today, 15,000 rupees every month in debt funds in which the average returns is 7%, your goal will be achieved in 3 years. You will get the investment value of 6 lacs. If you want to invest for a very small period, you can choose liquid funds, ultra-short term, low duration, short term, mid-term, long term and gilt funds. It is not necessary that you make only short term investments in debt funds. If you want to take least risk, and make investment on longer term then you can use debt funds for investment. Gilt funds are also special type of funds that invest only in government securities. For example, government bonds or bonds of state governments. So it is relatively safer. In the last 1 year, gilt funds have given more than 12% returns.

• Now let’s go to the second goal. My second goal is that I want to buy a home in 10 years. So my goal and duration is 10 years. When the duration of your investment exceeds 3 years there are special case of mutual funds that we call equity mutual funds. The benefit of equity mutual funds is that though your risk taking capability should be more, you get more returns. In this case, when your duration is more than 3 years, you should keep your portfolio balanced between debt mutual funds and equity mutual funds. To explain easily, if you like to take more risks, you should buy more equity mutual funds rather than debt funds. If the duration is the same but your risk appetite is low, then you should buy more debt funds than equities. Let’s do the calculations for our second goal. You want a home 10 years from now. Its value will be Rs. 50 lacs. If from today I make Twenty five rupees investment every month, as I told you our duration is 10 years, so I will invest in debt as well as equity. If my overall returns is 10% from both, then my investment goal will be achieved. My investment value will reach Rs. 50 lacs after 10 years using which you can fulfil the dream of buying a house. Like Different types of debt funds there are different types of equity mutual funds too, they are Small cap mutual fund, mid cap mutual fund, large cap mutual fund, and multi-cap mutual funds. If we start from large cap funds, large cap equity mutual funds are the mutual funds that invest in large cap companies. Large cap companies like Reliance, Tata the big companies. So large cap mutual funds that invest in equities have lower risk when compared to mid-cap and small cap funds, and so is the returns. Likewise, small cap mutual funds are those that invest in small cap companies, or small companies.

• Let’s talk about my third goal. Imagine that I am 30 years old now. I want to retire 30 years from now. When I retire I need money that will take care of my basic needs. So friends, now my duration is 30 years. When the duration becomes 30 years or long, As I mentioned there are types of equity mutual funds: small, mid and large cap. So if we talk about longer duration, my risk appetite is slightly bigger I can take more risks. In that case, the I can invest more in small cap or mid cap rather than large cap. That way I can balance my overall portfolio because I invest some money in small cap some in mid cap some in large cap and also some in debt funds so that my overall portfolio is diversified, risk is more and I get more returns. Let’s discuss the third goal. Like I told you I want to retire after 30 years, and I need Five crore rupees to retire to ful-fill my basic needs. For that I will have to invest in both debt and equity. If my duration is 30 years it is quite high so I can invest in small cap and mid cap equities. If I take more risk, I can expect more than 10%, I can expect 12.5% returns.If I invest Twelve Thousand every month on debt and equity in the future, for which I expect only 12.5% returns in the next 30 years my money will become 5 crores.

• Past performance: how your mutual fund performed in the past. As I told you in the beginning, past performance doesn’t tell you about future performance but it tells you about the fund manager’s capabilities how market was in the past, how other mutual funds performed then and how your mutual fund performed.You should always compare the past performance of your fund with other mutual funds of the same category. If I would like to invest in a mid-cap fund, and look at the returns of the last three years compare the returns to other mid cap funds in comparison, if the returns are good, the fund is relatively better. If it is not better, then the fund has not performed well.

• Expense Ratio. You might know that when you invest your money goes to an asset management company that will invest it on your behalf in either debt or equities. They too have expenses of running their company. This they take from your money so they can run their business. This we call Expense Ratio. Normally, the expense ratio ranges from zero to 1.5%. So when you think about investing remember to check the expense ratio. The more the expense ratio the more your expense will be as an investor. The less it is the better it is for you.

As I told you, to choose a good mutual fund, you have to look at its past performance and compare it with the category average and also, expense ratio and the fund manager’s profile are also very important in choosing a good mutual fund.

I had told you that I will tell you something if you have kept money in banks, in savings account or FD, there is a better investment option, where risk is very less, almost negligible. But you get better returns. And that is liquid funds. If you invest in liquid funds you get almost 6-8% returns. If your money is in savings bank and is not of use at present do invest in liquid funds. Whenever the need arises, you can make a one-click withdrawal to transfer it to your savings bank through.

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