Choose the Mutual funds based on your goals

We can choose mutual funds based on our goals. If funds need to be parked for contingencies, we can choose either liquid funds (if amounts are large) or short-term debt funds. There are some fund houses which gives ATM access to debt based funds.

For goals, which are 1 to 3 years away, choose debt-based funds. In a rising interest rate scenario, consider floating rate funds, while if interest rates are falling invest in pure income/bond funds.

For goals, which are likely to happen between 3 to 6 years, use combination of debt and equity based funds.

When goals are 8 to 10 years away, equity is the best option. Over the long-term, equity has usually beaten inflation by vast margins and probability of losing money is very low.

If you are new to equity investing, start with index funds. Index funds replicate the index. For example, Sensex-based index funds will invest in only those companies, which are constituents of the Sensex.

As and when you get comfortable with equity investing, move to diversified equity funds, which invest in large cap companies. Large-cap companies are well-established companies having long presence.

They are usually less volatile than small-mid companies and can withstand downturns in economy better than newer companies.

Small- and mid-cap companies rise and fall faster. On risk ladder they are more risky compared to large companies but can also give higher returns (and severe fall.) Having gained confidence with large cap companies, move to mutual funds, which invest in small-mid companies.

Once you are a 'fish in water' with volatility of equity markets, consider sector funds. These funds invest in single sector as IT, banks, FMCG. They are very high on risk ladder.

Mutual fund as an investment vehicle is the most convenient vehicle for investing in various assets classes. It gives benefit of professional management, option of investing in smaller amount, quick liquidity and diversification benefit.