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5.1          General Guidelines

5.1.1.       Investors’ Objective

The investment objective should be clear as this will be the basis for selecting the type of mutual fund for the investment. For example,

If the investment objective is to hold the money for a couple of months only then liquid mutual funds are selected while if the objective is to invest money for long-term capital gain, then equity-based mutual funds need to be selected.

5.1.2.       Invest in Multi-Cap Fund

It is better to invest in multi-cap mutual funds where the expert fund managers diversify the fund allocation as per the market requirements thus more gain is possible. It is not recommended for a general investor to carry out diversifying by investing in different sectorial funds and look behind that by themselves.

Note- For long-term wealth building the major portion of investment should be in multi-cap mutual funds not in small or mid-cap funds. 

5.1.3.       Invest Gradually

It is recommended not to invest in lumpsum as there are chances of booking permanent loss that may cause emotional disturbance. So even if you have a lumpsum amount, invest it in liquid funds first and then slowly invest the amount in equity funds in parts.

5.1.4.       Stick to Time Horizon

There is a different fund for different time horizons so make an investment as per the appropriate time horizon-

4.          For a few weeks to a few months, select a liquid fund

5.          For 1 to 3 years, select a short-term equity fund

6.          For 1 year or more- select an equity arbitrage fund

7.          For more than 5 years, equity funds

5.1.5.       Diversify

A minimum of 3-5 mutual funds need to be selected to invest. This practice is recommended because one mutual fund is handled by one or two fund managers only thus chances of getting something wrong are possible.

Thus, diversification of not only funds but fund managers is also an important criterion of fund selection.

2                          Portfolio

The ideal portfolio requires 4-6 types of mutual funds only which will satisfy all the needs of the investors. These funds might be natural as-

v  Short Term investment- Liquid fund

v  Medium duration- short-term debt fund

v  For beginners, Less risk- Index/balanced fund

v  Exclusive for tax saving- ELSS

v  Long-term goals – Diversified Funds

v  Long-term goals- Mid & small-cap funds