However, with a variety of Schemes of mutual fund available to invest, it is generally challenging for investors to determine the appropriate Scheme. This guide will help you learn the basics that will further aid in making informed decisions. However, we suggest you consult your financial advisor before investing.

What Are Mutual Funds?

Mutual funds pool money from various investors to invest in a diversified portfolio of assets such as stocks, bonds, and other asset classes as per their strategy and type of scheme mentioned in the Scheme Information Document. Managed by professional fund managers, these funds offer a way to invest in a broad range of assets without you having to pick individual securities yourself. This diversification helps spread risk and can lead to more potential returns over time.

Types of Mutual Fund Scheme

Mutual funds are broadly categorized into the following types: Equity, Debt and Hybrid Funds.

1. Equity Mutual Fund:

These funds primarily invest in stocks, offering the potential for high returns over the long term. There are 11 types of equity funds, each catering to different investment strategies. Large Cap mutual funds invest in the top 100 companies by market capitalization, while Mid Cap mutual funds target companies ranked 101st to 250th, and Small Cap mutual funds focus on those beyond the 250th rank. Another category called Flexicap Cap funds, invest at least 65% of their total assets in equities and related instruments and offer a diversified approach by investing across various market capitalizations. Other types include Index Funds, Sectoral/Thematic funds, taxing saving mutual fund such as Equity Linked Savings Schemes or ELSS, that help to save tax under section 80C of the Income Tax Act. These diverse options offer investors the flexibility to choose funds that best align with their financial goals and risk tolerance.

2. Debt Mutual Fund:

They may be considered for conservative investors who aim to prioritize regular income. These funds typically invest in bonds, such as government securities and corporate bonds, offering lower returns compared to equity funds but with reduced risk levels. Examples of debt funds include Overnight funds, Liquid Funds, Dynamic Bond Funds, Long Term Income Funds etc, which are relatively feasible investment options for those seeking steady returns.

3. Hybrid funds:

These funds invest in a mix of equities and fixed-income securities, offering a balanced approach to risk and return. Hybrid funds aim to provide growth from the equity portion and balance from the debt portion, making them suitable for investors seeking a moderate risk profile. E.g, conservative hybrid fund, balanced advantage fund, aggressive hybrid funds, etc.

Step-by-Step Guide to Choosing the Investable Mutual Fund Scheme

1. Define Your Financial Goals:

Clearly outline what you want to achieve with your investments like investing for Retirement Planning, child’s education, marriage etc. This will help choose appropriate asset class mix and based on that suitable the mutual fund schemes. Additionally, using a mutual fund SIP calculator can assist in estimating the potential returns and planning your investments more effectively.

2. Assess Your Risk Tolerance:

Understanding your comfort level with market fluctuations is very important. Equity funds come with higher risk and potential for higher returns, while debt funds offer potential returns.

3. Consider Your Investment Horizon:

Choosing the asset class also depends on tenure of your investment. Equity funds are one of the suitable for long-term investments (five years or more), while an investor may consider debt funds for short term investment plans.

4. Evaluate Fund Performance:

Although past performance of a fund does not guarantee its future returns, but the idea of it gives a sense of confidence to the investors. To avoid recency bias one should also look at different tenure of returns like calendar year returns, rolling returns etc. Potential returns across different market conditions are a good sign, even though they do not ensure future success.

5. Analyse Fund Costs:

Pay attention to the expense ratio associated with the mutual fund. Lower costs can significantly impact your overall returns, so opt for funds with competitive fees. Generally, Passive funds have lower cost of investment. One should consider consulting their financial advisor before investing.

6. Review Fund Manager Expertise:

Fund manager is a professional who manages your funds by investing the fund corpus and hence experienced and skilled manager may help the fund’s performance.

7. Diversify Your Portfolio:

Investing in different categories of mutual funds in different categories helps spread risk across different assets. A diversified portfolio can help manage market volatility to your investments.

8. Understand Tax Implications:

For Equity Mutual Funds, long term capital gains (LTCG) are taxed at 12.5% if held for more than one year and exceed Rs. 1.25 lakh annually. Short term capital gains (STCG) are taxed at 20% if held for less than a year. Now, the tax on debt mutual funds is applied at the marginal tax rate, irrespective of the investment tenure.

Conclusion

An individual may have multiple goals with different time horizons and each goal has to be managed separately. For instance, if an investor is planning to buy a house after ten years, they might consider investing a portion of their income every month via a Systematic Investment Plan.

If the investor aims for higher returns, equity funds could be considered. Here is a comparison of how the final corpus would look with different asset allocations and expected returns if one invests Rs 25,000 every month for the next ten years.

(The above is an illustration and provided for understanding purposes. The returns can vary depending on the market conditions.)

Apart from risk appetite, asset allocation also depends on the tenure of mutual fund investment. For short term investment needs, debt and hybrid funds may be considered as they provide and lower risk. Additionally, funds like overnight and arbitrage funds can be effectively used for cash management, providing liquidity and minimal risk. Whether you're a beginner or an experienced investor, there is a mutual fund to suit your needs. Start your investment journey with careful planning and enjoy the benefits of disciplined investing. Further, If you need personalized guidance, consider contacting a financial advisor.