It is a very common question yet very hard to give a straight answer to.

In this blog, we will break it down so that it is easier to make an informed decision.

1) Understand your risk profile: Selection of mutual funds is not just a function of their returns, but their risk adjusted returns. Equity mutual funds are inherently riskier versus a debt mutual fund as the former has a lot more volatile return profile. Therefore, it is important to understand if you would be able to stomach periods of volatile performance.

2) Time horizon: As a rule of thumb, the longer you invest, higher are your returns. If you’re investing for longer tenures (>5years), then your portfolio should have more equity mutual funds, while if you’re investing for the short-term, you should stick to debt and hybrid mutual funds only.

3) Goals: Your investments should align with your goals. Short-term goals will have a very different investment plan vs investments for long-term goals. For example, if you are thinking about retirement which is atleast 15 years away, you would want to invest in equity mutual funds, but if you’re thinking of travel goals for next year, then you would be investing in debt mutual funds.

4) Investing lumpsum vs SIP (Systematic Investment Plan): If you’re investing lumpsum, then you should steer clear of equity mutual funds as it brings a lot of timing risk into play. If the markets are at their peak, your returns would look bad for a prolonged period. On the other hand, if you’re investing on a regular frequency via SIP/STP, then equity mutual funds are definitely preferable as their cost will be averaged out. However, if you have lumpsum to invest, but want equity exposure and are willing to invest for the long term, then go for a Systematic Transfer Plan (STP).

5) Returns: The past returns, though important, are not the only metric to look at. We should look at rolling returns to see how consistently the fund has actually performed.

6) Fund manager profile: The person taking the investment decisions is the fund manager and hence it of utmost importance that the manager should be of a good pedigree.

The above list is indicative and there are many other nuances to select mutual funds. If you’re still unsure, we are happy to get on a call to help you decide. Contact us here.

DISCLAIMER: This blog is solely for educational purposes and not to offer any investment advice. Please do your own research or consult a financial advisor before making any investment decisions.