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This is mostly answered by a mutual fund manager. The manager will ask you a dozen questions wherein he will be able to analyze what your goals are and the investment tenure that you are looking for.

Depending on that he will pull out a list of mutual funds that have performed well in the past and whose investment objective matches yours.

For example, if you intend to buy a house in the next six years without opting for a home loan, the manager will put out statistics of those funds that have performed well in the last 5-6 years and guide you to choose those funds that are shining at present.

Depending on your age and risk appetite, fund suggestions will be made accordingly. For example, if you are young in your 30s and have a good risk-bearing appetite, you might be suggested sectoral, mid- or small-cap funds. All these methods of approaching a situation are good and must be utilised. But what makes a fund a good fund?

A good fund is that fund which has enjoyed the bull phase and suffered the bearish phases with grace. What should be understood is that stock prices fall when they get sensitive to the market crashes. In such situations your fund manager is the one who can help you out. By transferring fund from stocks to liquid instruments or cash, you tend to lose less than the market. An appropriate call should be made during a bull phase. Quickly identifying and investing in under-valued stocks can help the investor earn a lot during a bullish period.

This policy of handling these two market conditions can be applied to not only equity mutual funds but also diversified ones, tax plans, sectoral funds, contra and dividend yield funds. Analyzing each fund’s benchmarks and category averages in their bear phases and the jumps the fund has enjoyed during the bull period, can help you get a clear picture about the fund’s performance.

A clear mind and a sound judgement is what are required when you pick a fund. Try not to mix any emotional aspects and concentrate on the cost benefit analysis technique. Getting into a debt to fulfill your financial requirements is not desired. In order to stay out of such pressure, make sure that you have read about the terms and conditions of your desired fund, the objectives of the fund house you opt for. Choose that fund house whose objectives match yours.

Link your investments with the goals that you want to achieve. Be it even buying a laptop or plans to buy a second home, every financial related goal should be linked with your investments. This will give you the ability to save and procure the amount of investment required to fulfill your financial goals.

Also, do make sure to plan first wisely as to which market you would like to step in for investing. Many times the passive index fund of Sensex seemed to have outperformed its counterpart - the Sensex.

Following the principle of not putting all your eggs in one basket, try to diversify your portfolio by investing in various funds whereas increasing the ability to earn more when a fund’s value is appraised and also to reduce the risk that can be generated on the eventuality of a crash.

Ensure that you have a good understanding about how the markets function and moreover understand your risk appetite. If your risk appetite is good, go ahead and take calculated risks. If not, try for safer investment routes like the fixed deposits or by investing in debt funds.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

Story first published on: January 01, 2013 10:00 (IST)

Tags: mutual fund, equity fun

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