How to Choose Best Fund Vs Mutual Fund
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The Right Fund vs. Best Mutual Fund
When it comes to shopping, we often seek out the best—whether it’s clothes, shoes, or cars. However, this pursuit of the “best” can be misleading when selecting a mutual fund for investment. While it is tempting to go for the mutual fund that has shown spectacular returns in the last six months, this may not always be the right choice. See below for the How to Choose Best Fund Vs Mutual Fund in detail.
How to Choose Best Fund Vs Mutual Fund?
Investing in mutual funds requires a nuanced approach. The “best” mutual fund in terms of recent performance may not necessarily align with your specific financial goals and circumstances. To make an informed decision, one must consider whether the mutual fund in question is the “right” fund for their individual needs. What works for one person may not work for another due to a variety of factors.
Key Factors in Selecting the Right Fund
Investment Horizon
The investment horizon refers to the length of time you plan to keep your money invested. This varies based on different financial goals. For example, you might want to invest for ten years to save for a house but only a few months for a short-term goal like a vacation.
If your investment horizon is short, opting for low-risk mutual funds might be more appropriate. Liquid funds and short-term debt funds are ideal choices if your investment period is less than three years.
Risk-Taking Capacity
People have different levels of risk tolerance. A young professional who has just started working might be cautious about taking high risks due to a lack of investment experience. Conversely, someone experienced in equities may have a higher risk tolerance as they understand the market’s volatility and are emotionally prepared to handle it.
Age
Age plays a significant role in determining the right mutual fund. Financial needs and goals differ at various life stages. A person in their 20s may focus on goals like buying a bike or traveling, making equity funds a suitable option for long-term growth. In contrast, an individual in their late 50s might prioritize creating a sustainable monthly income source post-retirement. For them, a Systematic Withdrawal Plan (SWP) from a low-risk debt fund could be the right choice.
Urgency of Financial Goals
We all have multiple financial goals, but some are non-negotiable and urgent. These urgent goals often require a different investment strategy compared to less critical ones. You might allocate a higher portion of your investment portfolio towards these urgent goals. To achieve moderate risk and higher returns, a diversified portfolio comprising both equity and debt funds might be necessary. Consulting a financial advisor can provide tailored strategies for such detailed planning.
While it is natural to gravitate towards mutual funds with high returns, it’s crucial to assess whether those funds align with your personal financial situation and goals. By considering factors such as investment horizon, risk tolerance, age, and urgency of goals, you can determine the most suitable mutual fund for your needs.
Always remember that the “right” fund will vary from person to person, so personalized evaluation is key to successful investing. This is the brief information about the How to Choose Best Fund Vs Mutual Fund in detail.
