Mutual funds are considered best option for people who want to invest in equities, though they don’t have expertise in understanding the way stock markets work.

The mutual fund marketplace is a vibrant one. You have thousands of options to choose from dozens of fund houses. If you are looking to start investing, how do you pick from this plethora of options?

Mutual funds are a pure investment tool. Before you begin investing, you must have an objective. For example, you may want to invest towards creating a travel fund. With a clearly defined objective, it becomes easier to narrow down on the right investment instrument.

Let’s take a look at a few scenarios to help you find the right mutual fund scheme.

I want long-term growth without risks
First of all, every mutual fund scheme carries risks, and you should examine the scheme documents and track record before selecting one. That said, if you are looking to steadily build a corpus over the medium or long term without being exposed to the volatility of stock markets, you should pick a debt mutual fund. These funds invest in a mix of government securities, corporate deposits, money market instruments-basically, instruments that may be considered low-risk.   

I am looking to park my money temporarily
Pick a liquid mutual fund. These funds invest in short- term instruments such as treasury bills, bonds, fixed deposits, and money market instruments of tenures typically less than 91 days. Liquid funds have very low risk. They provide conservative returns. Where they score over other varieties of debt funds is that they do not typically impose an exit load, thus making them a good option for you to park your fund temporarily. They can be an alternative to fixed deposits.

I want to mix safety and risk
Pick hybrid mutual funds that invest in a combination of equity and debt securities. Monthly Income Plans (MIP) are debt-oriented funds that invest your money primarily (70 to 90 per cent) in debt and the rest in equity. Balanced funds are equity-oriented, investing large (65-90 per cent) in equity and the rest in debt. How much risk you take comes down to your personal risk appetite. If you are risk-averse, you may choose the debt-oriented hybrid funds.

I want long-term growth with moderate risks
Pick a large-cap equity mutual fund. These funds invest most of your corpus in large-cap companies, which have a track record for steady growth and limited volatility. Think long- term investing with equity for best returns. Long-term equity fund returns have usually been better than those from small savings schemes and debt investment options.

I want to take aggressive risks
You can pick small-cap and mid-cap funds, diversified equity funds (that invest in a mix of market-cap classes), thematic and sectoral funds (such as banking, energy, etc.), or international mutual funds (which invest in international markets). Be aware that your risks are significantly higher in these options. Therefore, you must invest in these options in a controlled and limited manner. If you face any volatility in stock markets, you must remain invested for the long term for best possible returns.  

I want to save tax
ELSS (equity-linked savings schemes) funds are equity mutual funds where investments up to `1.5 lakh per annum can be claimed as tax deductions under Section 80 C of the Income-Tax Act. These funds are great for tax-saving, wealth creation, and being tax-efficient on investment returns. There is a three-year lock-in on your units, which means your returns are tax-free.

I want to buy gold
It is possible to buy gold in demat form. Buying gold MFs is one to do this. This way, you can buy gold without the hassles of safe keeping, purity, and reselling. The underlying assets of these MFs are gold ETFs. Your returns would be linked to the performance of gold.

The writer is the CEO of BankBazaar.com