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Why choosing the right mutual fund scheme is important for wealth creation? – Economic Times

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Mutual funds are attracting many new investors these days. Everybody wants to invest in a good scheme or a few good schemes that will give them the best returns in five or six years. According to some mutual fund advisors, though investors place a lot of importance on ‘good schemes,’ most of them have no idea what makes a good scheme. The advisors add that instead of good schemes, investors should focus on the right schemes.

Here is an example: Suppose Ram picked up a largecap scheme to invest through an SIP for his retirement. It is a good scheme that has been a consistent performer in different market cycles. But is it a good scheme for Ram? In other words, is it the right scheme for Ram? It could be the right scheme for Ram, only if he has a conservative risk profile. If Ram is an aggressive investor, it may not be the right choice. He would be better off with a midcap or smallcap scheme. If Ram is a very cautious person who wants very little volatility, he should have picked up an equity-oriented hybrid scheme or a balanced scheme. What if Ram is totally risk-averse? He shouldn’t invest in equity schemes in the first place.

Now, the big question: sure, equity is risky and some equity schemes are riskier than others, but does it matter when you are investing for a very long term? The answer is yes. Talk to any seasoned advisors, and you would hear many stories about disappointed or dejected investors. The trouble is most investors can deal with risk only theoretically. When it hits them really hard, they lose their nerve. Most of them immediately stop their investments or sell them. As we all know this is exactly what an equity investor should never do. There is only one sure formula to make money from the stock market, and that is investing a small sum regularly over a long period. If you stop your investments or sell them, you would lose an opportunity to create wealth to meet your long-term financial goals.

It is not possible to avoid risk entirely when you are investing in the market, be it equity or debt. However, you can make it tolerable by choosing the right products. All you need to do is to pick schemes that match your goals, investment horizon and risk profile. It may sound a very simplistic approach, but it has helped many investors to create wealth for their long-term goals.
Here is how you can do it: Are you investing in the right debt mutual fund schemes ; All you need to know about equity mutual funds