3 Steps to Unravel Your Mutual Fund Investment Plan

Mutual funds like any other investment route are subject to a certain degree of market risk and are definitely not recommended for the completely risk averse. But for those who are willing to take low to medium risk, mutual funds can be quite rewarding with returns of up to 23% or even more over a 3 to 5 year period.

If you have financial constraints and cannot cough up lump sum amount for investment, opt for a systematic investment plan (SIP) that spreads out your investment over a period of time and small amounts are invested monthly. By using an SIP, you ensure that your monthly budget is not stretched while at the same time, you stay invested in the market for a longer time and derive greater benefits.

In our attempt to make it easier for you to decide on which mutual funds would be best suited for you, we have created a mutual fund selection tool that allows you to input key data and provides you with investment options that have been vetted by our experts. The following are a few steps that will help you choose the funds that best suit your requirement.

Step 1. Input Your Life-stage Information

We take into account some key factors like your age, gross annual income, marital status, and your level of understanding with regards to how mutual funds work. These factors would play a key role in determining the level of risk you would be comfortable with. If you are less than 30 years old and have a good understanding of mutual funds, it makes sense that you may decide to go for a high risk-high return option. On the other hand, if you are married with children, you will probably be less of a risk taker and instead prefer more stable options even though the potential returns might be lower. Additionally, your annual income will definitely determine the amount that you can afford to invest without having to spread your monthly budget too thin.

Step 2. Determine Your Risk Appetite

Depending on the level of risk you are comfortable with, you can choose among – consistent return, moderate return and high return. The rule of thumb is that the level of return is directly proportional to the risk involved. A consistent return represents a low risk option, which is reliable however the returns tend to be relatively low. But these returns are still much better than the return offered by your PPF account with a much shorter lock-in period. On the other hand, the high return option is a high risk proposition not suitable for the faint hearted, but if successful you may end up with returns of 23% or more at the end of a 3 to 5 year investment period.

Step 3. Plan your Investment Tenure

Depending upon your specific requirement, you may choose between short term, medium term or long term investment option. Short-term goals typically feature a time horizon of up to 2 years, while medium-term goals feature a time horizon ranging from 2 to 4 years and long-term goals typically represent extend till the time of retirement. In most cases, shorter terms represent a higher risk factor as compared to the longer term options. However, more importantly, for longer terms, you have to consider investing in a few different funds to spread your risk.

The following are a few examples of the type of mutual fund investment options that are provided by the Paisabazaar mutual fund selection tool:

Case 1: You are an unmarried investor in the 30 years to 40 years of age bracket with annual income of up to Rs 5 lakhs and interested in consistent returns over the short term (2 years) to achieve an investment target of Rs 75,000. In this case our tool suggests an SIP of Rs 2,900 every month in the Reliance Regular Savings Fund – Debt Option which features moderate risk and is a short term debt instrument.

Case 2: You are an unmarried investor aged below 40 years with annual income of up to Rs 5 lakhs and interested in high returns over the medium term to reach an investment corpus of Rs. 1 lakh.

In this case, our tool would suggest you invest in multiple options through a monthly SIP of Rs 2,500 as follows*:

*The figures in the table above are indicative and liable to change depending on market conditions and subsequent evaluations carried out by our experts.