Which Mutual Fund Is Suitable For You
- Mutual funds should be chosen according to the risk profile of the investor
- Income and liquid funds can serve the needs of conservative investors
- Semi-aggressive or moderate investors can choose hybrid funds
- Aggressive investors should go for a combination of equity and sector funds
There is a plethora of mutual fund schemes in the market and all of them serve different needs of different sets of investors, according to their risk profile. Here is a list of funds that are suitable for investors with different risk profiles.
The prime objective of a conservative investor is to protect capital. For this additional safety, they may be willing to settle for modest returns. Therefore, their investment universe is likely to be restricted to debt funds. Here are the funds that they can consider.
Income fund for Returns: Typically, conservative investors put 70-80 per cent of their corpus in income funds and the balance in short-term funds. Since income funds invest primarily in corporate papers (highest-yielding papers in the market), they have the potential to yield the highest returns among debt funds in the long run. So, income funds serve the returns objective.
Remember that some income funds try to squeeze out greater returns by investing in low-rated papers (credit rating of ‘A’ and below). A conservative investor should avoid them, as the chances of a default are higher. A default will erode your portfolio value as well as your capital.
Liquid fund For liquidity: Liquidity should be provided for by investing in short-term funds like liquid funds and short-term plans. Because of their focus on shorter-tenure papers, short-term funds show greater stability in returns compared to, say, income funds.
Semi-Aggressive or Moderate Investor
The semi-aggressive investor seeks a mix of steady returns and capital appreciation, for which he is willing to take on moderate risks. Hence, though he maintains a bias towards debt in his portfolio, he diversifies into equity to boost his overall returns.
Debt and equity combination: For such investors, hybrid funds work well as they offer the best of both the worlds—equity and debt. Those who are willing to do asset allocation on their own can invest in debt funds and equity funds separately. For the debt component, a mix of long- and short-term debt funds can be considered. For the equity portion, they can stay near the lower end of the equity risk ladder and allocate between index funds and actively managed diversified large-cap funds. For a new investor, hybrid equity funds could be a better starting point.
The aggressive investor desires market-beating returns and is, therefore, overweight on equity. They are more interested in high capital appreciation rather than steady returns.
Combination of equity funds: Among equity funds, a mix of conservative and aggressive schemes work for such investors. Under conservative schemes come diversified funds and index funds, which offer broad market exposures. Aggressive schemes, on the other hand, target a relatively narrower universe among stocks or follow an investment style that is inherently riskier. Among the current crop of schemes in the market, three categories stand out—small-cap, mid-cap and large-cap funds.
Sector funds, which invest in a particular sector, can also be used. The first three types of funds give a broad-based exposure, which makes them less risky than sector funds, which restrict themselves to just a particular sector. An aggressive investor can invest a part of his corpus in sector funds, but only if he understands the sector.
The most important thing is to know your risk appetite. If you know your risk appetite, it will help you select the funds according to your risk profile. If you are not sure about your risk profile and need help to make a decision, you may refer to Lifey from ICICI Securities or other websites that offer similar risk profiling tools.
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