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Choosing a fund – Name or Type?

by | May 21, 2018 | Finance, Mutual Funds

When I talk about Mutual Funds, many times I get a response “Sir, I’ve been investing in Mutual Funds for 3 years now. I know about Mutual Funds.”

Which Mutual Funds have you invested in?

“Sir, mainly HDFC, but I also invest in ICICI Pru”

Those are the AMCs, or companies. Which particular funds?

“That I don’t know. How do I find out?”

Quite a few people invest in Mutual Funds without even knowing the name of the fund – they just go to a broker, sign here, sign there and issue a cheque. Quite a few also look up the ET Wealth and invest in one of the ‘top five SIP’ list.

In my opinion, there are three points one needs to know before reaching for the cheque book to invest in a Mutual Fund. Here they are (in order of importance):

  1. Why?

Why am I making this investment? There has to be a goal – retirement, children’s marriage, children’s higher education, buying a car. All these are goals and assigning a time horizon to it is most essential. “I want to buy a car worth 10 lacs in 8 years” is a proper answer to the “Why?” If the horizon is 3 years or less, avoid an Equity Mutual Fund

  1. Which type of Fund?

Generally, a riskier fund has a CHANCE of earning better returns – it does not mean that it WILL earn better returns. When can we take a chance of going in for a riskier fund? When we have time on our side. Hence, a 25 year old should start a sip in the most riskiest fund when saving for retirement which is 40 years away, but a relatively less risky fund if he intends to use the money as down payment for a flat in 8 – 10 years time. How does having time help? As a rule, the riskier funds are volatile – they will give a return of say 50% one year and are quite capable of losing 40% the next year! The time horizon is just to ensure that the money is not needed when the markets are down.

  1. The name of the fund.

As per me, this is really irrelevant. The marketing department decides this depending on which section of the society they intend to target. If the target is the mother, then a fund with the word ‘Child’ in it works best. Just imagine – no mother could refuse to invest in a fund named “Children’s bright future fund”. It is only recently that SEBI has clamped down on this nonsense and ensured such mis-selling does not go on.



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Written By: niranjan

Financially Stupid Niranjan


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