What category of mutual fund schemes should I invest in, considering that the market is at all-time highs?
You would need to decide upon a mutual fund category, depending on your investment goal, time horizon and risk profile. There are different categories and sub-categories of mutual fund schemes and, being market-linked, all of them come with a certain amount of risk. We have described in brief the main categories; depending on your investment horizon, you would need to consider all other factors before investing.
For an investment period of five years or more, equity mutual fund schemes can generate great long-term tax-free returns, provided you use the right schemes. The key here is long-term investment which should ideally be for a period of at least five years. Assuming that you wish to invest for the long term in an equity fund, you could consider investing through a systematic investment plan (SIP) as the market is currently is not yet overvalued compared to the earlier peaks.
SIP investing is ideal for investors who do not have a lump-sum to begin with but can invest small amounts regularly. SIP, being a formula of investing gradually and regularly, also helps you to avoid the dilemma of making a sizeable one-time investment in equity and run the risk of seeing your wealth decline sharply.
For short-term investments, you may consider short-term bond schemes (or debt schemes) of mutual funds which invest in low-risk (Please note: not risk-free) debt instruments. Presently, bond yields are over 8.50% and could go higher, or lower, based on the policy decisions taken by the Reserve Bank of India. Short-term debt funds invest in market instruments of short maturities, such as certificates of deposits, commercial paper, etc. These are less sensitive to interest rate fluctuations.
If you are looking for high liquidity and wish to earn an interest higher than the interest earned on your bank savings account, you could invest in liquid schemes. Depending on your investment horizon, you may invest in any of these categories or a mix of them.