Avoid confusion: make the most of your MF investments

As most mutual fund investors would know, asset management companies (AMCs) offer a wide variety of mutual funds.

The range on offer not only covers different asset classes (such as equity, debt, and commodities) but also different genres within the same asset class, capable of confusing all but the smartest investors. (See: Every good mutual fund investor knows these basics)

However, there is a method in this apparent madness. What one needs to understand is the method, rather than being confused by the diversity of funds.

Each type of fund has a specific investment objective with a specific return profile, risk profile and liquidity profile, which one needs to understand to meet one's asset portfolio needs.

For example, if you wish to invest for just a few months, it would not be advisable to invest in equity funds; short-term debt funds would be more appropriate. Or if you are a new investor just starting to build a long-term portfolio, it would be better to start with the domestic funds rather than the very high-risk international/global funds.

Your choice of funds has to be in line with your investment objectives, your risk appetite, your liquidity needs and your tax profile. Most amateur investors are influenced by what their friends, colleagues or neighbours say. Since we all have a different financial profile, tax status, etc, this is a recipe for poor MF investment decisions.

Moreover, one's financial profile changes with age and other factors. At a young age one's appetite for risk may be fairly high; as one ages and acquires a family, this may all change.