If you are planning to invest in mutual funds but are confused about Which mutual fund is right for you? So if you want to select a mutual fund in your own way, then for this you will have to select two things.
The first is your risk appetite, that is, how much risk you can take. And the second is your time horizon. So let’s analyze the funds on the basis of these two.
What Are The Types Of Mutual Funds?
So mutual funds are 3 main types of mutual funds and they are as follows:
- Equity Funds
- Debt Funds
- Hybrid Funds
In which the Equity Fund is the main which is further divided in 6 types they are:
- Index Fund
- Large Cap Fund
- Mid Cap Fund
- Small Cap Fund
- Multi Cap Fund
- Flexi Cap Fund
The Best Type Of Mutual Funds To Invest?
Large Cap Funds
So first of all, if we talk about the Large Cap Fund, then you should only invest in the Large Cap Fund when your time horizon is at least 3 to 5 years or more than that. Because if you invest in any equity-linked mutual fund for less than 3 years, then the risk is very high there. Because it is very difficult to say what will happen in the stock market in 2-3 years.
But in the long term, the stock market generally performs well. That is why it is advised that if you want to invest in large-cap stocks for more than 3 years, then you can do that. But never invest in a mutual fund for less than 3 years because there will be more risk there. So this was about the time horizon.
| FUNDS | TIME HORIZON | RISK APPETITE |
| Large Cap Fund | For more than 5 years | High Risk not favourable |
| For 3 to 5 years | Money is invested in large cap companies with less volatility | |
| For Less Than 3 Years | Not Recommended |
Now if we talk about risk appetite, then if you can take high risk, then these large-cap stocks are not favorable for you. Because here your money is invested in all well-established large-cap companies where the volatility is very low and the risk is also very low in the long term. Because of this, the returns are also not very good.
So if you don’t want to take much risk and want to earn decent returns and your time horizon is more than 3 years, then large-cap stocks will be best for you.
Mid Cap Funds
About mid-cap funds, in mid cap funds, your money is invested in mid-cap stocks. And mid-cap are those stocks that are now established but are also in the growing phase. So there is a little more risk than large-cap, but there are also more chances of getting more returns than large-cap funds.
| FUNDS | TIME HORIZON | RISK APPETITE |
| Mid Cap Fund | Best For more than 5 years | Established buy growing companies |
| Average For 3 to 5 years | Established by growing companies | |
| For Less Than 3 Years | Not Recommended |
But mid-cap funds are best when your time horizon is at least more than 5 years. If you want to invest for 3 to 5 years, then you can consider them. But if your time horizon is more than 5 years and you can take the right risk to earn decent returns, then mid-cap stocks are best for you.
Small Cap Funds
Next, if we talk about small cap funds, then your money is invested in India’s small but growing companies. Here, generally, your money is invested in such companies whose market cap is less than 5000 or 7000 crores.
So there is a lot of risk in them, but the chances of getting the most returns are also here. So if your risk appetite is very high and you want to take more risks and earn more returns, then you should invest in small-cap stocks. Your time horizon should be more than 5 years.
| FUNDS | TIME HORIZON | RISK APPETITE |
| Small Cap Fund | Best For more than 5 years | High Risk with high returns |
| For 3 to 5 years | Not Recommended | |
| For Less Than 3 Years | Not Recommended |
If your time horizon is less than 5 years, then it will be better if you do not invest in small-cap stocks. After this, if we talk about multi-cap funds, then because your money is invested in all three types of funds, then there is less risk than small-cap, but still, there is a good risk, because of which the chances of getting good returns are also high.
However, it is not suggested that multi-cap funds because there is a limit on the fund manager that he has to invest at least 25% of the money in all types of stocks, due to which the flexibility of the fund becomes very limited and the fund manager does not get a chance to use his skills and knowledge.
Multi Cap Funds
If you still want to invest in it, then you should go for multi cap funds and only invest when you can take high risks and your time horizon should be at least 5 years.
| FUNDS | TIME HORIZON | RISK APPETITE |
| Multi Cap Fund | Best For more than 5 years | Invest when ready for high risks |
| For 3 to 5 years | Not Recommended | |
| For Less Than 3 Years | Not Recommended |
Flexi Cap Funds
In flexi-cap funds, since there is no limit here, the fund manager can invest your money in large-cap stocks, mid-cap, or small-cap. That’s why it’s the best alternative to multi-cap funds. But because your money here is allocated by the fund manager on the basis of his knowledge, experience, and skills, then the risk is high, but with this, the chances of getting high returns also increase.
But you should also invest in this when you want to invest for the long term and your time horizon is at least 5 years.
| FUNDS | TIME HORIZON | RISK APPETITE |
| Flexi Cap Fund | Best For more than 5 years | High Risk with high returns |
| For 3 to 5 years | Not Recommended | |
| For Less Than 3 Years | Not Recommended |
Index Funds
Now if we talk about index funds, then because your money is invested in the index, but in the long term, you can assume that index funds are the safest in equity funds.
| FUNDS | TIME HORIZON | RISK APPETITE |
| Index Cap Fund | Best For more than 5 years | Replica Of Index |
| Average For 3 to 5 years | Less Volatile | |
| For Less Than 3 Years | Not Recommended |
And because India is a developing country, then as India develops, our index will also increase. So if you have invested in the index, then you will also get good returns. So if you want to invest for the long term, i.e. more than 5 years, or mid-term, i.e. 3-5 years, and you want to make a safe investment in equity, then you can invest in an index fund. And because this is a passive fund, the expense ratio is also low here.
Conclusion
So if you want to invest for the long term and your risk appetite is high, then small-cap funds or flexi-cap funds will be best for you because they can give you the best results in comparison to your risk. Similarly, if you want to invest for the long term and your risk capacity is low, then index funds are best for you.
Now if you want to invest for the mid-term, i.e.3-5 years, and your risk appetite is high, then in this situation, index funds and mid-cap funds can be a good option for you.