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Which are the Best Mutual Fund Categories for every Investment Horizon?

Posted on 21 Aug 2024
Author: Sayan Sircar

Tags: Portfolio Construction ; Calculator

6 mins read
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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?

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:

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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.

Bucket Wise Mutual Fund Categories

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.

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