There are over 750 different mutual funds in India today and about 35 different companies that run these funds. So, how will you choose which fund to invest in?
Firstly, know your own needs. Are you investing to fulfill a short-term or a long-term goal? Or, are you investing just because you heard in your office cafeteria that you should invest in a certain fund? Not all mutual funds serve the same purpose, so you should know why you are investing. If you want capital appreciation for your son's education 20 years from now, you should not invest in a bond fund. However, if you want to save and protect your capital for funding your son's education in 2 years time, then you should consider a conservative fund like a bond or money market fund, which will also give you some income
Secondly, this brings us to time horizon. What period are you ready to invest in the market for? Equity funds should be held for at least 3-5 years because equities are long-term investment vehicles. Debt or money market funds, however, can be invested in for shorter periods of time.
Thirdly, how comfortable are you with the promoter of the fund? Many new companies are starting fund houses. Many of them will not be as successful as the ones that already have a successful track record that they have built over the past 5-10 years. So, invest in mutual funds that have been launched by companies that have a track record and are not new into the Indian market.
Finally, many investors look at past performance and assume that the fund will continue to return the same in the future. This is not always true and can often be wrong. Any fund can do well over a short-term because luck and other factors can come into play. So, do not choose a fund to invest in just because it has done well in the recent past. You should be interested in the long term performance of the fund. Invest in funds that have done well across market cycles and investment cycles.
