Mutual Fund Investments Should Match Your Risk Profile And Goals

Investors in India are increasingly choosing mutual funds. Given the variety of options, it might be difficult for investors to select the best mutual fund scheme suitable to them. While return is a crucial factor, investors should pay more attention to the risk taken by the fund manager than merely its absolute returns and they should focus more on the amount of risk they are willing to accept for possible returns.

A mutual fund scheme’s investment objective and its approach to the portfolio should be an important criterion. Some investment plans may invest in stocks, while others may invest in bonds or both (hybrid). Debt-oriented funds provide lower returns but are less volatile than equity-oriented funds, which typically offer higher returns, but it also carries higher risk and volatility too. Based on their investment objectives, investors should select a mutual fund scheme that matches their risk profile and goals.

The performance of the fund may not be fully depicted by historical returns alone. Investors must consider the volatility of returns over time. A scheme with high returns but excessive volatility may not be suitable for investors seeking stable returns. For risk-averse investors, a scheme with moderate returns but low volatility would be a preferable option.

The track record of the fund manager and his team is another important factor to consider. The success or failure of a fund can be dramatically impacted by the fund manager and his team. Investors should find out a fund management team which has a track record of effectively managing risk and generating returns. Different fund managers have different styles of managing funds like aggressive style, defensive style, contra style, etc.; remember that depending upon the market cycles, different investment styles work. Investors should focus on the long-term potential of the scheme rather than being persuaded by short-term returns and market fluctuations.

Investors should also diversify their portfolios by investing in a variety of asset classes. They should not look at the risk of individual schemes but should focus on their own portfolio levels. Proper diversification lowers the portfolio’s total risk. But at the same time, many investments in the same asset classes should be avoided by investors, as it might result in overexposure and an increase in the risks.

While investing in equity mutual funds, investors should have a long-term time horizon. The power of compounding can produce considerably higher returns over a longer period.

While investing in debt mutual funds, investors should match the modified duration of the portfolios with the objective of their investments. Instead of looking at past performance, they should focus on the YTM of the portfolio, the quality of the papers invested by the fund manager, and the expense ratio of the fund.

In conclusion, investing in mutual funds requires careful consideration of a number of variables. Novice investors should consider a scheme’s investment objective, historical performance, volatility, fund manager’s track record, style of managing the fund, and the expense ratio, to name a few. Investors can make wise investment decisions and create a good investment portfolio by considering these aspects. In order to get the most out of their money and achieve their financial goals, my advice to investors is to consult their financial advisor, who understands the intricacies of mutual fund schemes, and discuss with him in detail all the aspects and then construct a rock-solid investment portfolio.

Sandeep Gandhi, CFPCM. is the CEO of Mega Financial Services. He has vast experience in financial services of more than 35 years. He can be reached at ceo@megafina.in.

Disclaimer

The views are personal and are not part of the Outlook Money editorial Feature.