-Dibyendu NayakWe always believe that investors should choose their mutual funds based on their financial goals, investment horizon, and risk profile. Applying the first two factors, you can choose equity mutual funds to meet your long-term financial goals. However, do you have the necessary risk appetite to choose a large & mid cap scheme and small cap scheme? These two categories are typically recommended to aggressive investors with high risk appetite and ability to tolerate volatility. You have to ensure that you are okay with the extra risk associated with these schemes.
Take an online quiz if you are not sure about your risk profile. Do not confuse the ability to take risk with your risk tolerance. You may have the ability to take risk (you may be young or rich, for example), but you wouldn’t be comfortable with extra risk in your investments. It can be more of a mental makeup. That is why it is always better to take a quiz to identify your risk profile.
You have chosen good individual performers with a long-term performance record. However, you should be mentally prepared for long periods of poor performance, including negative returns or losses, and volatility. Only if you can continue with your investments during such challenging times, you should invest in these schemes.
Finally, it is always better to quantify your goals, provide for inflation to reach a realistic target. This will help you to meet your goals without fail. For example, let us assume that the fee for college is Rs 10 lakh. The same course would cost around Rs 46.61 lakh after 20 years, assuming an annual inflation of 8%. You need to invest around Rs 4,665 per month to create the target corpus of Rs 46.61 lakh at the end of 20 years. Note, we have assumed an annual return of 12% for the calculation, and we have also assumed that you are investing for 20 years. Ideally, you should take the money out of equity at least a few years before your goal. So, you should always keep the investment period lower.