How to choose a Mutual Fund?

 

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Which player will you buy Dhoni, Kohli or Tendulkar?

This article is based on an assumption that Sachin Tendulkar is still playing and Virat Kohli to be a newcomer. So assume that you are an IPL team owner who is about to invest money for buying players for his IPL team. Now the question is; which player will you buy out of Kohli, Dhoni, or Tendulkar!

Will you go with the player with a very long successful past track record or the one who is performing currently with a potential to even perform better in future or a player in between? Well you will find yourself in the same situation when you think of investing in Mutual funds, whether to go for Large Cap/ mid cap or small cap schemes? Let’s understand:

  1. Well Established Schemes:

In the past i.e. few years back, you must have heard of schemes like HDFC Top 200, Reliance growth etc. with a very impressive returns and records, you can call these funds the “Tendulkars of Mutual funds” Schemes.

  • Who should invest?

It is suitable for Investors with low risk appetite.

  • What can you expect?

These funds have grown phenomenally in size and have large AUM exceeding Rs. 8 to 13,000 Crores. This is a stage where the past performance cannot be replicated by the fund manager as it would be practically impossible to manage so much cash to get the same kind of past returns. The best time to invest in it was 5-10 years back. You can expect moderate returns if you wish to invest in these schemes.

  1. Mid-Cap Schemes:

These funds invest in Companies Like “Dhoni” who is in the middle of Tendulkar & Kohli, already performed well but still can go up to further heights.

  • Who Should Invest?

It is suitable for Investors with good risk appetite and those looking for higher returns.

  • What can you expect?

Typically these schemes invest larger proportion in mid-cap stocks and some amount in large cap & small cap stocks as well.  This strategy will pay off greatly in case of booming market as it tends to out-perform the benchmark and provides higher returns. These schemes should be a part of your portfolio provided you have an investment period of say 4 to 5 years. Though it comes with the risk similar the way that not everybody like “Dhoni” would become “Tendulkar” but when it does; then sky is the limit.

  1. Small Cap or Emerging Funds

Small cap schemes are like investing in Companies like “Virat Kohli” who has been performing well but still need to go some miles ahead to become either Dhoni or Tendulkar.

  • Who should Invest?

Investors with a very high risk appetite & looking for very high returns.

  • What can you expect?

These funds will take some time to mature and generally young investors can invest in these schemes as they have time and ability to bear the risk & cover up the losses if these schemes do not perform well. And similar to Mid-cap schemes, Small cap schemes will give much higher returns in case of a rising market.

Conclusion

You need to choose wisely before you invest and should be based purely upon your risk appetite and investment horizon.

Important Note: This article is based on an assumption that Sachin Tendulkar is still playing and Virat Kohli is a newcomer.

So stay alert, stay smart! Click here to Invest in Mutual Funds through myCAMS

Author : CA Rishabh Parakh

( The Author is Founder & Director  of Money Plant Consulting. He has conducted 300+ seminars and has changed the lives of more than 300,000 people till now.)

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Sudarshan Ranganthan

Breaths Investments, Suggests Wealth Creation Ideas, Lives on Law Of Attraction

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