Which are the Best Mutual Fund Categories for every Investment Horizon?
This article breaks down mutual fund categories based on your investment horizon—whether it’s 5, 10, or 15 years away.
Which are the Best Mutual Fund Categories for every Investment Horizon?
Posted on 21 Aug 2024
Author: Sayan Sircar
6 mins read
📢Join 3500+ readers on WhatsApp and get new post notifications!
This article breaks down mutual fund categories based on your investment horizon—whether it’s 5, 10, or 15 years away.
Disclaimer: This article does not have a list of best mutual funds. This article talks about mutual fund categories based on your goal and risk profile and how far your goal is.
📚 Topics covered:
- Why should you choose mutual funds based on how far your goal is?
- How to allocate mutual funds to each five-year group?
- How do you determine how much to allocate to each bucket?
- What happens to these category allocations after a year?
Why should you choose mutual funds based on how far your goal is?
The whole idea of goal-based investing relies on being able to access the target amount of your goal on the day it is due. For example, if you plan to pay ₹10 lakhs as fees for your child’s higher education and have invested for that goal, the money should be available on the admission date. To ensure this, the ₹10 lakh amount should not be invested, just before the payment is due, in any investment that carries risk, such as stocks, equity mutual funds, or certain debt funds whose value fluctuates daily or could suddenly fall.
On this basis, we have divided your entire goal horizon into five-year groups and allocated mutual fund categories according to the associated risk:
- Year 5 or less: This is for goals due within the next five years. A good example might be purchasing your next car or going on a foreign trip.
- Year 5 to 10: This is for goals due after five years but before ten years. A good example might be purchasing a house.
- Year 10 to 15: This is for goals due after ten years but before fifteen years. A good example might be paying admission fees for your child’s college degree.
- Year 15 or more: This is for goals due after fifteen years. A good example might be your retirement goal.
How to allocate mutual funds to each five-year group?
We will categorise the investor population into three risk-based categories:
- Low-risk profile
- Medium-risk profile
- High-risk profile
Here is a detailed post on how to determine your risk profile for any goal. Based on that, you can proceed with choosing mutual funds.
Low-risk profile
| Target allocation | Years 5 or less | Years 5 to 10 | Years 10 to 15 | Years > 15 |
|---|---|---|---|---|
| Equity | N/A | Large-Cap | Large-Cap | Large-Cap |
| Debt | N/A | Arbitrage | Money Market | Short-term Gilt |
| Cash | Liquid | N/A | N/A | N/A |
Medium-risk profile
| Target allocation | Years 5 or less | Years 5 to 10 | Years 10 to 15 | Years > 15 |
|---|---|---|---|---|
| Equity | N/A | Large-Cap | Large-Cap | Mid-Cap |
| Debt | N/A | Money Market | Short-term Gilt | Long-term Gilt |
| Cash | Arbitrage | N/A | N/A | N/A |
High-risk profile
| Target allocation | Years 5 or less | Years 5 to 10 | Years 10 to 15 | Years > 15 |
|---|---|---|---|---|
| Equity | N/A | Large-Cap | Mid-Cap | Small-Cap |
| Debt | N/A | Short-term Gilt | Long-term Gilt | Long-term Gilt |
| Cash | Money Market | N/A | N/A | N/A |
Depending on your understanding of risk/return potential, other fund categories like international stocks, gold, or other debt fund categories can be added to the appropriate bucket.
To understand which mutual funds are the best in their category:
Also read
When to Sell a Mutual Fund
When to Sell a Mutual Fund
How do you determine how much to allocate to each bucket?
We need a method to divide your entire portfolio into these 12 categories (3 buckets: equity/debt/cash and 4 time-based groups) and allocate the correct amount of mutual funds to each.
The Arthgyaan goal-based investing calculator shows you how to do this by making it easy to see how much of your existing portfolio should go into each bucket and year-based cell as shown in the image above. The detailed concept is explained here: Which are the Best Mutual Fund Categories for every Investment Horizon?
We will use Google sheets to create a simple calculator for this calculation. There is a link to download a pre-filled copy of the Google sheet via the button below.
Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.
This table is in the “goals” tab on the right.
For example, based on the above, the category-wise allocations will be:
| MF Category | Low | Medium | High |
|---|---|---|---|
| Large-Cap | 19.05 | 17.46 | 0.55 |
| Mid-Cap | 0.00 | 1.58 | 16.92 |
| Small-Cap | 0.00 | 0.00 | 1.58 |
| Liquid | 15.55 | 0.00 | 0.00 |
| Arbitrage | 1.73 | 15.55 | 0.00 |
| Money Market | 12.62 | 1.73 | 15.55 |
| Short-term Gilt | 1.06 | 12.62 | 1.73 |
| Long-term Gilt | 0.00 | 1.06 | 13.68 |
| Total | 50.00 | 50.00 | 50.00 |
What happens to these category allocations after a year?
After a year, three things happen that you need to track as part of your annual portfolio review:
- Your monthly investment amount will change based on your income.
- Various investments will go up or down due to market movements.
- Your goals will change as time passes and preferences evolve.
As a result, the values in each cell above will change, and you will need to review and rebalance the portfolio.
Related Articles
- Retirement Portfolio Strategy: How to Allocate Equity, Debt, and Cash Buckets for Maximum Security and Growth
- Gilt funds do not always go up in value. Should you invest in gilt funds?
- I am now ready to do goal-based investing. What now?
What's next? You can join the Arthgyaan WhatsApp community
You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.For resident Indians 🇮🇳:
For NRIs 🇺🇸🇬🇧🇪🇺🇦🇺🇦🇪🇸🇬:
Share on WhatsApp: To understand how this article can help you:
If you have a comment or question about this article
The following button will open a form with the link of this page populated for context:If you liked this article, please leave us a rating
The following button will take you to Trustpilot:Discover an article from the archives
Previous and next articles:
Latest articles:
Topics you will like:
Next steps:
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourself.Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.
Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.
More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled Which are the Best Mutual Fund Categories for every Investment Horizon? first appeared on 21 Aug 2024 at https://arthgyaan.com
We are currently at 503 posts and growing fast. Search this site: Copyright © 2021-2024 Arthgyaan.com. All rights reserved.