Mutual fund investors may find themselves confused looking at the thousands of mutual fund schemes available in the market. With so many schemes to choose from, it becomes difficult for the investor to zero in on schemes that meet the financial objectives and requirements specific to the investor. So, how do you go about choosing a scheme that is just right for you? There are four simple steps to making that choice.

First, you need to decide whether you want to invest in equity or debt scheme. If your expectations of returns are high and if you are prepared to take higher levels of risks, you can go for equity funds. However, if you expect modest but steady returns with relative safety of capital, you should opt for debt funds.

Second, you have to choose between close-ended and open-ended funds. If you wish to have liquidity in your mutual fund investment so that you can redeem your units as and when you need the money, you will have to invest in open-ended funds, which provide the facility of redemption any time after purchase. On the other hand, closed-ended fund can be redeemed only on maturity, so your money will get stuck up till the maturity of the mutual fund scheme. Hence, if the scheme is for five years, you should invest only if you are sure that you will not need the money till maturity of the scheme. However, some closed-ended funds are listed on the stock exchanges to provide liquidity to the investors, but these are very thinly traded and are usually traded at a discount to the NAV.

Third, mutual fund schemes come with growth and dividend options and you have to choose one among the two options. The scheme with growth option does not distribute the amount of dividend declared to the investors but reinvests the same in the scheme. As a result, the capital appreciation is higher in the case of growth scheme. In the case of dividend option, the dividend declared by the scheme is distributed among the investors, so while the investor gets a regular dividend pay-out, the capital appreciation will be lower. The dividend option is suitable for those desiring to have regular income, while the growth option is suitable for those looking for long term capital appreciation.

Finally, you need to decide whether you wish to go for a regular plan or a direct plan. The regular plan can be bought through your broker, agent or distributor, while the direct plan can be purchased directly from the mutual fund house. These two plans differ only in terms of their annual expenses. Since the direct plan does not involve any intermediaries, the expense ratio is always lower than the regular plan as there is no commission or brokerage to be paid in the direct plan. Due to the lower expenses, the NAV of the direct plan is always higher than the regular plan, which ensures higher return for the investors.