Mutual fund investment: Nowadays, mutual funds have become the first choice of people to grow their savings and build long-term wealth. But when a new investor enters the market, the biggest question before him is where to start. Hundreds of schemes like large-cap, flexi-cap, mid-cap, small-cap, hybrid and debt are available in the market. Each scheme has different risk, profit and timing. In such situations, most new investors take an easy shortcut. They just see which fund has given the highest returns in recent times and invest money in it. According to experts, this method can cause huge damage.

How to choose the right plan?

Rishabh Garg, CEO of FundsIndia.com says that just looking at past performance is not enough when choosing a mutual fund. Whether a fund is right for you depends on what your target is and how much loss you can bear if the market falls. According to Rishabh, there are three basic things a new investor should check before looking at any fund.

1. The first thing is your financial goal and the time available for it. For example, money set aside for a trip after two years in a fund earmarked for retirement after 20 years should never be invested. The strategies for both are completely different.
2. The second most important thing is actual damage tolerance. Garg says investors should not estimate risk in words alone. They should honestly think about how they will actually behave if their portfolio falls by 20 to 25 percent in a bad phase. If an investor panics and pulls out of his scheme at the first big drop in the market, then the fund was not suitable for him, no matter how excellent the past returns of that fund have been.
3. The third thing is related to the fund, including its category, its track record in different market cycles and expenses. These things should be looked at only after determining the goals and risks.

It is wrong to select a scheme only by looking at past returns.

Often new investors flock to funds that appear at the top of the charts. Rishabh Garg cautions that past returns are certainly useful, but should not be the sole basis for decision-making. A fund that topped the list in one-year returns may have outperformed because a certain segment of the market was bullish during that particular period. As market conditions change, the performance of such funds also changes.

Therefore, instead of looking at just one year of data, investors should look at 3-year, 5-year and, if available, 10-year performance. Apart from this, it is also important to check how well the fund handled itself when the market was falling and how it performed compared to its fellow funds. Garg says that a scheme that consistently gives stable returns is better than a fund that sometimes gives very high and sometimes very poor returns.

Choose the right category according to your goal

Investors should plan in the opposite direction according to their goals. If the money is needed in a year or two, debt funds are better. Hybrid funds are a good option for goals beyond a few years. While equity funds are considered best for goals of five years or more.

In equities, large-cap and flexi-cap funds can form the mainstay of a new investor’s portfolio. Mid-cap and small-cap funds have the potential to grow rapidly but are also subject to significant volatility. Therefore, new investors should avoid investing large amounts in this initially.

Choose a scheme based on time

1. 3-year target: If the down payment of the house is to be done in three years, the priority should be capital preservation. For this, attention should be paid to debt or short-term funds, of which a very small portion may be hybrid.
2. 5-year goal: If money is needed to enroll a child in school after five years, both growth and stability will be needed. In such a situation, a debt fund with a hybrid or flexi-cap can be chosen. As the goal approaches, the money should gradually move towards debt.
3. 10-year goal: For goals longer than 10 years, such as retirement, a larger portion can be held in equities, as a longer time horizon gives a better chance to recover from market declines.

Simple formula for choosing mutual fund

To avoid getting bogged down with hundreds of plans, you can adopt a simple formula of ‘goal, range, check’. After this you can select one or two suitable plans of your choice.

1. The first step is to decide the ‘goal’ i.e. how much money you need and when you need it.
2. The second step is to choose the right category as per your time frame and risk. This reduces the list of hundreds of options to just a few funds.
3. The third step is the ‘check’, in which 3 to 4 funds in that category are compared based on their long-term performance, costs and fund house strength.

It is more effective for a new investor to start with one well diversified scheme rather than buying five different schemes at once.