Which mutual fund categories are the right buy to meet medium-term financial goals? Experts weigh in

Mutual Funds: When planning to invest in mutual funds, the timing of your goal is your most important guide. Generally, the closer you are to needing the money, the safer your investment should be. For instance, if your goal is less than a year away, experts recommend parking your savings in debt mutual funds.

For financial goals of five years or more, mid-cap funds are often a strong choice. But what is the best strategy for investors in the middle? Here are the key points to consider for medium-term investing:

These are some of the key points to note:

I. Inclination to equity: When the financial goal is medium-term away, i.e., 5-7 years, one may risk putting money in equity. And from a medium-term perspective, one could invest in large-cap and flexi-cap mutual funds.

“Large-cap and flexi-cap funds emerge as the preferred equity categories. Large-cap funds offer relative stability, better downside protection, and predictable performance, making them suitable as the core equity allocation. Flexi-cap funds complement this by providing the flexibility to dynamically allocate across market capitalisations, allowing fund managers to capture opportunities while managing risk,” says Sachin Jain, Managing Partner, Scripbox.

II. Diversification is indispensable: When the financial goal is due after a long time, one should refrain from risking too much money in one category. Experts recommend diversification across asset classes, allowing for compensation if one category underperforms through the performance of other categories.

“For medium-term goals, which are typically 5 to 8 years away, you can utilise a mix of equity and debt mutual funds, or you could opt for mutual funds that offer a bundled product. If you choose to maintain a separate allocation of 50% to equity and 50% to debt, consider using a large-cap or Nifty Index fund for the equity portion, while for the debt allocation, you might select a money market or short-term debt fund,” says Preeti Zende, founder of Apna Dhan Financial Services.

“While mid-cap and small-cap funds have the potential to deliver higher returns, they have also shown phases of modest or even negative performance over 5–7-year periods. This makes relying on a single high-risk equity category imprudent for medium-term goals. Hence, diversification becomes the cornerstone of effective portfolio construction in this timeframe,” adds Jain.

III. Debt and precious metals: Apart from equity, it is recommended to invest a portion of the portfolio in debt (say 20%) and precious metals (say 10%) for a healthy portfolio. “Although gold prices jumped this year, there could be long periods when they do not rise more than 4%. Therefore, the ideal allocation to gold is 10%, and 20% to debt,” says Sridharan Sundaram, founder of Wealth Ladder Direct.

IV. Risk appetite: Finally, one more thing that is considerably important is the investor’s risk appetite. If it is high, s/he can allocate a bigger portion to equity and a smaller one to debt + gold. Conversely, if the risk appetite is anywhere between moderate to low, one could double down on debt and other safe havens.

“For a moderate-risk investor, an ideal medium-term allocation would typically include a higher tilt towards large-cap funds, followed by flexi-cap funds, a limited exposure to mid and small caps, around 20–30% in fixed income, and 5–10% in precious metals,” adds Jain of Scripbox.

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