A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
How do you choose a mutual fund?
Imagine asking a travel agent, “How should I choose my mode of transportation?” The first thing he’ll say is, “It depends on where you want to go.” If you were to travel at a distance of 5 km, an automatic rickshaw might be the best option, while for a trip from New Delhi to Kochi, a flight might be the best. A flight would not be available for a short distance and an automatic rickshaw would be very inconvenient and slow for a long distance trip.
Even in mutual funds, the starting point must be: What are your needs?
Start with your financial goals and appetite for risk.
You must first identify your financial goals. Some mutual fund schemes are suitable for short-term requirements or goals, while some may be better for long-term goals.
Then comes your appetite for risk. Different people would have a different appetite for risk. Husband and wife may also have common finances but different risk profiles. Some are comfortable with high-risk products, while others simply aren’t.
You can get help from financial planners or investment advisors or mutual fund distributors to assess your risk appetite.
