Most investors look at past performance while choosing a Mutual Fund to invest in. But that’s the wrong way to go about mutual fund investing because performance doesn’t give you the complete picture. Return comes with risk. A riskier fund is likely to give higher return than a less risky fund. Risk in a fund depends on the kind of portfolio the fund has invested in. But how much risk each one of us is comfortable with should decide the fund we choose.
Let’s understand this with an example, say retirement planning. While this is a common goal for each of us, it is still unique for each one. You may be just 30 yrs old and trying to build a retirement corpus while your uncle who is 52 is also investing for the same goal. You can take much higher risk because you have 25-30 years in hand but your uncle has to be very cautious in his choice of funds because he has just 8-10 yrs left for this goal. While your uncle may choose a hybrid fund, you can afford to choose an aggressive equity fund.
Choosing a fund means looking for a fund whose risk seems agreeable to us and whose return potential is likely to match our goal within the time horizon we’ve set for the goal.