How to choose MF category for investing?

It’s been around one year since SEBI (Securities and Exchange Board of India) came up with the mutual fund recategorization. This move by SEBI was to avoid the confusion among the investors regarding the product offerings done by the AMCs (Asset Management Companies). But still, people are still in dilemma on which category on mutual funds they must choose. There are various factors one must consider before choosing mutual funds category.

Risk profile is one of the most important aspects that would help you decide which category of mutual fund is good for you. Suppose if your risk profile is assessed as aggressive then mid-cap and small-cap category equity mutual funds may be suitable for you, but if you are conservative then you are better off investing more in large-cap equity mutual funds. So it is very important to assess what kind of risk you are comfortable with.

Another important factor is tenure. For how much time you want to park your money in mutual funds is also one of the deciding factors If you want to park your money for a few days to three months then liquid mutual funds would be better for you. On the other hand, if you can part with your money for six months or one year, then ultra-short term debt mutual funds is a better choice. If your investment tenure is from more than a year to three years then short-term debt mutual funds would be a better option or if it is more than three years then equity mutual funds would be a better bet.

Diversification is also a major factor. Diversification means spreading your investments across categories and not investing in multiple mutual funds of the same category. This would help you build an efficient portfolio which may reduce your overall risk over a period of time.