Many people decide to invest in mutual funds. But then, they don’t know the steps to choose a mutual fund.
In this simple guide, you will see a simple way to choose a mutual fund for yourself.
Step 1: Define Goal
Whenever you invest, you usually would have a certain expectation for that money. That is the goal.
For example, you could be investing for long term goals: for retirement, for your children’s education, for a buying a house, and so on.
You could also be planning for short-term goals: buying a new car, going for an international vacation, upgrading your cell phone next year when a new version is out, and so on.
Remember, each and every goal has a different time frame for investment. Your goal’s investment duration is very important for selecting a category of mutual fund to invest in.
Step 2: Choose a Category of Fund
You must already be aware, mutual funds come in various categories.
Each category is suited to different durations of investment. The longer you invest for, the riskier the fund you can invest in. And therefore, the longer you invest for, the more gain you get per year too.
You can see all the categories of mutual fund here: mutual fund categories.
Use this table below to choose a fund category for your goal.
|Liquid Funds||Few days – Few weeks||7-9%|
|Ultra Short Term Funds||6 months – 1 year||6-9%|
|Gilt Funds||1+ year||8-10%|
|Short Term Funds||1-3 years||5-9%|
|Income Funds||1-3 years||8-10%|
|Debt Oriented Balanced Fund||2-3 years||8-12%|
|Eqiuty Oriented Balanced Fund||2-3 years||10-15%|
|ELSS Funds||3 year (mandatory)||15-20%|
|Large-cap Funds||4+ years||12-18%|
|Mid-cap Funds||6+ years||15-20%|
|Small-cap Funds||7+ years||15-20%|
|Multi-cap Funds||7+ years||15-20%|
|Sector Funds||7+ years||Variable*|
Step 3: Choose Method of Investing
There are two ways to invest: lump sum and SIP.
In lump sum, you invest one time and let the money remain in the mutual fund for as long as you plan to.
In SIP, you invest a fixed amount of money in a mutual fund of your choice every month.
This amount gets automatically deducted from your account once you set up a biller.
If you have a large amount of money, you should invest via lump sum. On the other hand, if you save money regularly and would be able to invest monthly, you should opt for SIP.
Know more about SIP: 13 Things to Know About SIP.
Step 4: Choose a Mutual Fund
Now that you know which category of fund to invest in and the method of investing, you have to choose one or more funds to invest in from your chosen category.
There are many aspects of a mutual fund you can look into.
One of the easiest ways to select a fund is by its rating.
Groww rates each and every mutual fund on offer on a 5-star rating system where 5 stars stand for best funds.
Now simply login to your Groww account (or sign up if you’re new) and invest in your chosen mutual fund!