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 should you choose the right type of equity fund for investment?
Choosing a stock fund for your investment portfolio is like choosing clothing, although the decision-making process is more complex in this case. Just the way you look at a shirt or dress in detail, how well it suits you, comfort, will serve the purpose or occasion for which you are buying the outfit, choosing a mutual fund for your portfolio requires a similar approach, to put it simply.
Before you go shopping for an investment in a stock fund, you need to look at your existing investment portfolio. What kind of investments do you already have, just like what kind of clothes do you already have in your wardrobe and what is missing? You may already have some equity fund investments or have no exposure to capital as an asset class. So the next stock fund you choose should close the current gap in your overall investment portfolio. For example, if you’ve already invested in a diversified equity fund, you can consider a different type of equity fund that suits your risk preference and investment goal such as the Multicap or mid-cap fund. It could also be a tax savings fund if your goal is to save taxes and you don’t have such a fund in your portfolio. You need to spread the risk of your equity asset class through diversification between different types of funds.
The next thing to look for is the fund’s appearance in terms of investment objective, portfolio in terms of sector and holding stocks, fund managers, vintage, risk parameters, expense ratio, etc. This is like looking for the style, color, fabric and finish of the outfit you want to buy. Then you evaluate whether the details fit you just like the fit of a dress. The fund must meet your requirements or goals that you have in mind. At this point, you can look at its performance track record with its benchmark.
The next time you want to invest in a fund, systematically follow the selection approach above or contact a financial advisor for help.