Mutual Funds- What, Why, and How?

· What is a Mutual fund? Mutual fund is nothing but a portfolio of stocks. When you buy a stock, you are buying a share of ownership in one company. Mutual fund on the other hand is a pooled investment that contains shares of many companies. So, when you buy a mutual fund, you are buying multiple stocks in a single transaction.

· Why Mutual fund (instead of buying a stock)? Stock picking requires a lot of time, energy, and skills. Hence, it is not feasible for everyone to pick stock directly. With mutual funds, you are getting a fund manager and team of analysts to work for you and that too at very low charges! There are several other benefits as well for investing in mutual funds:

o Diversification

o Tax benefits

o Liquidity

· How many funds should I add to my mutual fund portfolio? Although it is individual specific, but I think 4–6 mutual funds should suffice for most of the retail investors.

o Equity funds (2–3)

o Debt funds (1–2)

o International/Gold/Specific theme(1)

· How can I find the best mutual funds? This one is a little tricky and depends on your goal and experience. There can be so many permutations and combinations. For example:

o If you are a first-time investor and looking to invest for a short-term goal, i would say go for a debt fund (liquid or ultra-short term)

o If you are a first-time investor and looking to invest for tax benefit, i would say go for tax saver fund

o If you are a first-time investor and looking to invest for long term, i would say go for an index fund

o If you have experience of investing and looking to invest for long term, i would say go for a multi-cap fund

Once you zero down on the mutual fund category, all you need to do is look at the best performing fund in that category. For best performing fund, don’t just look at the last 6 months or 2 years return. You should look at the fund that performed better than its peer in a bull market run and performed less worse than its peers in a bear market run. That’s what makes a mutual fund “the best mutual fund” in its category.