Not all mutual fund schemes suit you

Although the mutual fund schemes have become popular among investors, many investors invest following others without considering their own risk-taking capabilities and time-horizon. So, they don't get the desired returns or sometime make losses. Let's discuss the issue.

The mutual funds are becoming more and more popular. More and more people from all income classes have been investing in various mutual fund schemes. But it has been noticed that many new investors have been investing without doing adequate research. Those investors have been investing without considering their own risk-taking capabilities and time horizon. These investors are investing in following others blindly. This may be a dangerous trend. The investors must understand that not all mutual funds are suitable for them. They must invest based on their risk-taking capabilities and time horizon. In this article, we will now discuss some common misconceptions which may hurt inexperienced investors who invest without much study or analysis of the mutual fund schemes in which they invest.

Please remember that not all equity funds are similar

So far as equity funds are concerned, there are various types. Some equity funds invest in large-cap stocks, some invest in mid-cap stocks and some in small-cap stocks. There are some funds which invest in all types of stocks. The risk associated with each type of equity mutual fund is different. Small-cap funds which invest in small-cap stocks are most risky and they witness maximum volatility. This type of fund is not the cup of tea for every investor. So, investors must study the risk and then only invest in a suitable fund. They must not follow others blindly.

Invest in equity fund if the time-horizon is minimum five years

Many new investors start investing in equity mutual funds (any type) for quick gains. But they must understand that the returns from equity mutual fund are not uniform. It varies widely in every year. For a considerable good return over a period, an investor must invest in equity fund for at least five years. If the investor's time horizon is less than five years, then he/she should go for other types of fund avoiding equity-based mutual funds.

Debt funds may also have considerable risks

Besides equity funds, some investors invest in debt mutual funds thinking that the debt mutual funds are entirely risk-free. But in actuality, this is not so. Debt funds can also eat away the principal amount. For example, the dynamic bond funds can make a loss for short-term. The gilt funds are directly related to the interest rate movement. So, these two types of funds are generally more volatile. The debt fund investors must clearly understand various types of debt mutual funds available in the market. They should understand their functioning, how and where they invest and various other concepts yield, interest rate movement, etc. Only after thoroughly understanding the underlying concept of investment by the fund managers, they should choose debt fund(s) suitable for their individual requirements.

Arbitrage funds are suitable for tax-saving by HNIs

Arbitrage funds are a different category of funds which are basically low-risk equity options. These funds get tax benefits like equity mutual funds, i.e., the profits earned by such funds are not taxable after one year. But the returns from arbitrage funds are not very high. Common investors must understand that this type of fund is suitable for High Networth Individuals ((HNIs) for tax-saving purposes. For common investors, the ELSSs are more beneficial. So, please don't get trapped by the statement like "Arbitrage fund provides tax-saving benefits after one year". The return generated by arbitrage fund may not serve your purpose, especially if you come under lower tax-bracket.

Final few words

The financial experts always advise the mutual fund investors to invest considering their risk-taking abilities and time-horizon. So, I would advise new investors to start investing in equity-based hybrid funds if their specific goal is more than five years away. If the goal is to be achieved in around three years, they should invest in debt-based hybrid funds. If they want to park funds for a short period but want more return than the savings account, they should go for liquid funds. For dealing with market volatility, the investors must take SIP route. At the same time, the investors must study the functioning of various types of mutual funds for better understanding which would enable them to invest in a systematic and logical manner.

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