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Want to invest in mutual funds? Here’s help on choosing the right scheme categories

Depending on the time horizon of your investment, the fund categories would be vary

October 01, 2021 / 10:30 AM IST

There are far too many of mutual fund categories out there. And they can be all too confusing. Picking the unsuitable ones can really hamper the chances of your investments doing well.

So, in this article, we shall try to keep things simple. We just look at the categories suitable for your goals that are one, three, five and 10 years away. And we also consider different investor types (Conservative, Balanced and Aggressive) while picking these categories.

MF Categories for 0-1 years

Equity funds are a straight no. Just keep it simple and go for pure debt. For different investor types, the following may be suitable.

-Conservative Investor: Liquid funds

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-Balanced Investor: Liquid funds, Ultra-Short Duration funds

-Aggressive Investor: Liquid funds, Ultra-Short Duration funds, Arbitrage Funds (more suitable for those in the higher tax brackets)

MF Categories for 1-3 years

Once again, this time frame is best suited for debt products only. The following categories can be considered.

-Conservative Investor: Liquid funds, Ultra-Short Duration funds, Arbitrage Funds

-Balanced Investor: Ultra-Short Duration funds, Low Duration funds, Money Market funds, Arbitrage Funds

-Aggressive Investor: Ultra-Short Duration funds, Low Duration funds, Arbitrage Funds, Conservative Hybrid Funds

Also read: How to choose ultra-short, low and short-duration funds

MF Categories for 3-5 years

Some risks can be taken for this time horizon. But only by suitable investor types and not all. So, for conservative investors, it is better to have pure debt. For others, a bit of equity can be explored. The following categories are suggested for different investor types:

-Conservative Investor: Ultra-Short Duration funds, Conservative Hybrid Funds, Banking and PSU funds

-Balanced Investor (for debt part): Ultra-Short Duration funds, Low Duration funds, Money Market funds, Banking and PSU funds

-Balanced Investor (for equity part): Aggressive Hybrid Fund

-Aggressive Investor (for debt part): Ultra-Short Duration funds, Money Market funds, Corporate Bond funds

-Aggressive Investor (for equity part): Flexicap funds, Large-cap funds, Aggressive Hybrid funds

MF Categories for 6-10+ years

This is a long enough time horizon to consider equity seriously. Different investor types will still need to have different equity allocations suitable for them and their goals. The following categories are suggested for different investor types.

-Conservative Investor (for debt part): Ultra-Short Duration funds, Low, Duration funds, Short-Duration funds, Banking and PSU funds, Conservative Hybrid Funds

-Conservative Investor (for equity part): Large-cap funds, Aggressive Hybrid funds

-Balanced Investor (for debt part): Ultra-Short Duration funds, Low Duration funds, Short-Duration funds, Banking and PSU funds

-Balanced Investor (for equity part): Flexicap funds, Large-cap funds, Large-&-Midcap Funds, International Funds

-Aggressive Investor (for debt part): Low Duration Funds, Short-Duration funds, Corporate Bond funds

-Aggressive Investor (for equity part): Flexicap funds, Large-cap funds, Large-&-Midcap Funds, Midcap & Smallcap Funds, International Funds, Aggressive Hybrid funds,

The above listing looks crowded. But pick an investor type and then look at the category recommendations to get the right direction.

You can, of course, go outside these suggestions and invest elsewhere (in other categories) as well. But in my view, the suggestions made above are sufficient for a majority of the retail investors. Also, not all investment products/categories are suitable for investments. Some products that are best avoided by most investors. So don’t venture into these unless you absolutely know what you are getting into.

Also, what about debt Funds other than Liquid, Low, Ultra-Short, Short, Money-market, etc. that have longer duration portfolios?

For most investors, it’s better to stick to funds with shorter duration portfolios. These have comparatively lower interest rate risk and, if picked well, also offer low credit risk. The point is, when investing in debt, better play it safe and simple. For return maximization, equity is already there, so why take unnecessary risks in the debt side of the portfolio and lose sleep?

By the way, just picking the right fund category won’t help. As the funds within each category itself vary from being good, not-so-good and really bad ones. So, you need to be careful while picking funds from the suggested categories. Moneycontrol now offers MC30 – a curated list of fund recommendations across different fund categories. You can pick a few from the MC30 list and get your MF portfolio going.
Dev Ashish The writer is the founder of StableInvestor.com
first published: Oct 1, 2021 10:30 am

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