Mutual Funds are market-linked products that carry various kinds of risks and their returns are not guaranteed. Choosing the right mutual fund involves not only looking at its investment objective, return potential but also an evaluation of its riskiness. Since every investor has a unique personality including risk preference, the choice of mutual funds will be unique to each investor. Apart from risk preference, every investor will have a certain goal in mind that would be unique in its value and time horizon. Hence choosing the right mutual fund requires one to evaluate various funds along with the risk-return-time horizon metric.
Let’s understand this with an example. A 30 year old and a 50 year old may both be investing for retirement, but their choice of funds will be different. The 30 year old can take a much higher risk as he/she has 25-30 years left but the 50-year old has to be very cautious in his/her selection because he has just 8-10 yrs left for this goal.
Select a fund whose risk profile matches your risk appetite. If you prefer less risk, choose a debt fund. If you don’t mind taking risk, look for a suitable equity fund. If you prefer moderate risk, look for a hybrid fund. Thus, the starting point for fund selection should be how much risk you are willing to take.