Which MF categories should you invest in this Diwali? Experts suggest funds for conservative, moderate & aggressive investors

Diwali is considered an auspicious time to begin new investments, and many investors use the festive season to put their savings to work. However, choosing the right mutual fund category is important to ensure that investments are aligned with an individual's risk appetite, financial goals and investment horizon. A category that suits a conservative investor may not be appropriate for someone willing to take higher risks for potentially better returns.

So, which mutual fund categories should conservative, moderate and aggressive investors consider this Diwali? ETMutualFunds reached out to three financial experts to understand the investment options, asset allocation strategies and risks investors should consider based on their risk profiles.

Conservative investors

Conservative investors generally prioritise capital preservation and relatively stable returns over aggressive wealth creation. However, keeping all their money in traditional fixed-income investments may not always help them beat inflation over the long term. They can consider a combination of debt-oriented funds and limited equity exposure, depending on their investment horizon and ability to withstand market fluctuations.


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Manish Kothari, CEO and Co-founder of ZFunds told ETMutualFunds that a conservative investors can build their Diwali allocation in layers depending on their risk appetite and very conservative investors can consider short-duration and corporate bond funds.

Kothari said starting yields are attractive and markets are already pricing in three to four rate hikes, which gives fresh investments a cushion. Investors willing to take slightly higher risks can consider conservatively positioned equity savings funds. According to Kothari, elevated yields and reasonable equity valuations make this category well placed for the next two to three years.

He also suggested selective exposure to Specialised Investment Funds (SIFs) positioned around arbitrage or Fixed Income Plus strategies, which can offer better yields and tax efficiency after a one-year holding period. However, the choice of category should match an investor's time horizon and tolerance for volatility.

On asset allocation, Kothari suggested that conservative investors could consider allocating 70-90% of their portfolios to debt and income-generating options, including debt funds and InvIT-focused funds. Equity exposure, mainly through hybrid, large-cap or flexi-cap funds, could account for 10-20%, while gold could make up 5-7% as a hedge.

These allocations are indicative and should be adjusted based on an investor's time horizon, cash flow requirements and ability to absorb volatility.

Kothari also cautioned investors against ignoring inflation while evaluating returns, limiting diversification only to debt and equity, and chasing higher yields without assessing credit risk. He said investors should look beyond traditional asset classes to options such as REITs, InvITs and commodities, while remembering that higher credit yields generally come with higher risks.

Moderate investor

Moderate-risk investors typically seek a balance between capital growth and stability. They can take some equity exposure to generate long-term returns but may not be comfortable with the sharp fluctuations associated with mid-cap, small-cap or sectoral funds. Hybrid mutual funds, which invest across asset classes, can help such investors balance growth and risk.

Pallav Agarwal, Certified Financial Planner at Bhava Services LLP told ETMutualFunds that hybrid funds are best suited for moderate-risk investors. He particularly recommended multi-asset allocation and balanced advantage funds, which combine growth with stability and offer automatic rebalancing across asset classes.

Along with these categories, aggressive hybrid funds or large-cap-oriented funds can form the core equity allocation for investors with a longer investment horizon. Agarwal advised moderate-risk investors to avoid mid-cap, small-cap and sectoral or thematic funds because of their higher volatility.

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For asset allocation, he suggested a mix of 50-60% equity, 30-35% debt and 10-15% gold. Investors can rebalance this allocation once a year based on the valuations of these asset classes.

Agarwal said the current valuation of the Nifty 50 is fair and not stretched. Therefore, investors can deploy 30-40% of their intended investment as a lump sum and stagger the remaining amount through a systematic transfer plan (STP) over six to 12 months from an arbitrage or liquid fund. He also advised investors to continue their existing SIPs with discipline.

Aggressive investor

Aggressive investors have a higher risk appetite and a longer investment horizon, allowing them to take greater equity exposure for long-term wealth creation. They can consider diversified equity categories such as large-cap, flexi-cap, mid-cap and small-cap funds, depending on their experience and ability to withstand market volatility. However, higher-risk categories such as sectoral and thematic funds require careful selection and monitoring.

Shivam Pathak, CFP and Founder of Asset Elixir told ETMutualFunds that investors starting their investment journey can consider large-cap or flexi-cap funds for equity exposure. Those with a lower risk appetite can opt for hybrid funds, while investors comfortable with higher volatility can explore mid-cap and small-cap funds.

On sectoral, thematic and international funds, Pathak said aggressive investors with a long-term investment horizon can explore these categories. However, they should be selective and assess valuations and growth prospects before investing. He advised investors to deploy money gradually instead of making large lump-sum investments.

Pathak also recommended continuing regular SIPs across market cycles. Investors with surplus money can use market corrections to increase their equity exposure gradually rather than attempting to time the market.

Unsure about your risk profile? Which mutual fund categories can you consider?

Investors who are new to mutual funds or unsure about their risk appetite may find it difficult to choose between equity and debt categories. In such cases, diversified hybrid funds can offer a starting point by spreading investments across multiple asset classes.

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Kothari suggested that such investors consider balanced advantage or dynamic asset allocation funds, which adjust equity exposure based on valuations. For equity exposure, they can look at large-cap or flexi-cap funds, or a Nifty 50 index fund. Short-duration funds, corporate bond funds or arbitrage funds can provide stability.

He suggested a possible starting allocation of 50-60% in hybrid funds, 20-30% in large-cap or flexi-cap funds and the balance in debt. He also recommended starting through SIPs rather than investing a lump sum and avoiding thematic or sectoral funds initially.

Agarwal said multi-asset allocation funds could be the go-to category for investors who are unable to assess their risk profile. These funds invest across asset classes such as equity, gold, silver and debt. Some also invest in REITs, InvITs and international equities. According to him, this category offers diversification and relatively lower volatility than pure equity mutual funds.

Pathak suggested that investors unsure of their risk profile could consider hybrid funds such as balanced advantage funds or conservative hybrid funds. The choice should depend on their investment horizon and comfort with market fluctuations.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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