How to pick up the best mutual fund scheme?

Every investor has a reason to invest depending upon their various needs and financial goals. There is no one solution to all. In order to cater to a wide range of investor requirements, various types of mutual funds categories are designed to allow investors to choose a scheme based on the risk they are willing to take, the investable amount, their goals, the investment term, etc.

For example, a young investor may take more risks and opt for an equity-based mutual fund, whereas a retired investor might do well by channelizing his funds towards a debt-based mutual fund with only a small or zero exposure to equity.

Similarly, while a long-term investor might take the Systematic Investments route and reap the benefits of staying invested, an institutional investor might just park excess funds in a liquid fund for just a few days and earn handsome returns.

Mutual funds allow investors to spread their investments across various asset classes based on risk profile, investment needs, and horizon. Based on their structure and objective, mutual funds can be classified into:

Categorization by structure:

1. Open-Ended Schemes: These funds buy and sell units on a continuous basis around the year and, hence, allow investors to enter and exit as per their convenience. The key feature of open-ended schemes is high liquidity.

2. Closed-Ended Schemes: The unit capital of closed-ended funds is fixed and they sell a specific number of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO period is over. This means that new investors cannot enter, nor can existing investors exit till the term of the scheme ends.

3. Interval Schemes: With characteristics of both open ended and close-ended schemes, they allow investors to trade units at pre-determined intervals.

Categorization by investment objective:

1. Growth/Equity Schemes: The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

2. Income/Debt Schemes: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

3. Balanced funds: The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60 per cent in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

4. Money Market/Liquid Schemes: These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities; etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

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