Getting Your Mutual Fund Recipe Right

MFs are for all ‘reasons and seasons’. Here’s how to choose your flavour.

- Balaji Rao

How do we make a cup of hot tea? A particular measure of tea leaves, sugar, water and milk are put in a vessel and one waits for the ingredients to mix well at the right temperature and Voila! one has a steaming, good cup of tea. And let’s not forget that at times we even add some elaichi (cardamom) or adrak (ginger) for enhancing taste!

Investing in mutual funds too is similar to brewing tea or coffee where various ingredients (asset classes) must be added in the right measure (allocation) to get the final taste (returns) right, so that we enjoy the outcome. Mutual funds are a unique medium of indirectly investing in the debt and equity markets for those who does not have the time to study market risk, conduct research, and time entry and exit into the market, etc.

As mutual funds are investments “for all reasons and seasons”, everyone should take advantage of this opportunity. However, which fund to invest in should be based on time horizon and expectation of returns. To meet investor expectations, mutual fund houses help design various types of portfolios with assistance from expert fund managers.

Profile of investors

There are different mutual fund categories to cater to different investor profiles — conservative, moderate, aggressive and very aggressive — so that the investing process becomes easy and precise. In thematic funds, the risk increases as the possibility of returns on investment increases. This is because “lower the risk lower the return, and higher the risk higher the return.”

Before we get into understanding how to invest we will understand what large, medium, small and micro-cap companies are because this would define the risk and return parameters for an investor.