It may seem to just choose any mutual fund for a period of 10 years or so in order to get its benefits. However, it is quite a challenge to make any decision for investment when it comes to choosing the suitable product irrespective of whether it is a mutual fund scheme or a commodity or even stock. Also, there is always a fair share of risk involved in selecting products based only on the performance in the past without emphasizing sufficiently on other aspects like the downside risk, charges, performance linked consistency and more. Investors should be wary enough, so as not to fall prey to fly by night financial advisors and consequently get hold of any mutual fund investment plan that offers extremely high returns (too good to be true) within a very short period of time.
Making a wrong choice amidst hundreds of offers is indeed confounding, which can lead to considerable monetary loss. According to industry experts, the primary step for investors before blindly looking for the best mutual funds to buy is to identify the objective, time horizon, and risk appetite of their investment before arriving at a plan. Depending on the plan for investment, the categories of funds can either be equity, hybrid or debt. Within a particular category one can select the right scheme on the basis of certain specific aspects like the earlier performance of the mutual fund plan, how it measures up to the benchmark and peer set, measure of volatility and the performance of the mutual fund plan which is adjusted for risk and the size of the scheme among others.
Investors often prefer to use a combination of schemes to create a mutual fund portfolio. However, it can prove to be quite risky to do so without realizing the composition of the portfolio should be in sync with their risk profile. One should be extremely mindful of his/her risk profile while adding schemes to their portfolio.