Which is the best mutual fund according to your risk appetite

Mutual funds are wonderful investment options that address a wide variety of financial needs and goals. You can invest the idle cash in your savings bank account in liquid mutual funds and earn a higher return than your savings bank account while at the same time have the flexibility of liquidating it at any time to meet your needs. You can invest in mutual funds to earn short term higher yields than fixed deposits.

Mutual funds can help you plan for your longer time investment goals as well, like purchasing a house, your children’s education, their marriage, your retirement or simply for wealth creation purposes. Even after your retirement, mutual funds can help you meet your post retirement regular income needs and beat inflation.

You must read what are different types of mutual funds in India

Mutual funds also cater to a wide spectrum of risk appetites. Risk and return are directly related. Therefore, if your investment objective is capital appreciation then your risk appetite should be high. Usually, if you have a long investment horizon then you can afford to take risks. However, risk appetite also is related to your investment temperament. We are all humans and each of us is different from one another. Some investors may want capital appreciation and have a long investment horizon but may not have appetite for lot of volatility. Fortunately, mutual funds offer solutions for such investors too. Sometimes an investor may have different risk tolerance towards two different investment goals, even though both goals are similar in nature from an investment objective and horizon perspective.

Did you know the benefits of investing in equity mutual funds

For example, an investor can have a fairly high risk appetite for his retirement planning investment, but a lower risk tolerance for his child’s higher education investment. The investment choices for these two investment goals, though of similar nature, should be different.

For each financial goal, investors should define the following:-

  • What is their investment objective? Is it capital appreciation or income generation
  • What is the time horizon of your goal, short term, medium term or long term, in number of years
  • What is their risk taking appetite? i.e. how much risk you can take with your investments
  • What are the liquidity needs over the investment period

The table below shows, the various investment options that mutual funds can provide depending on the investment horizon and risk tolerance levels of the respective investors.

However, the investors should note that the table above is only a broad guideline; there can be several nuances of risk return characteristics of different types of mutual funds and there will be overlapping areas. There are also liquidity and tax considerations which you must consider before starting to invest in different mutual funds.

Investors should also note that, their investment timeline (horizon) and risk appetite are also related – longer the investment horizon, higher should be the risk appetite. Investors who have multiple financial goals which need to be met at different point of time, therefore, should not invest only in schemes of a particular risk profile. Each investment should be based on a specific goal and risk considerations thereof.

While selecting different funds for different investment objectives, particularly long term goals, equity mutual funds can be a very good option. However, you should first know what are equity mutual funds and their various types