Mutual funds are pools of money that are collected from the investors and then invested into debt, equity and other securities. The returns from these investments are distributed on a pro rata basis to the investors’ unit holdings. There are largely two types of mutual fund: one is actively managed and the other is passively managed. Actively managed mutual funds are taken care of by the fund managers who actively conduct research about potential companies and execute the investments of the fund and try to earn good returns for the funds. Passive funds are those that track some benchmark like the BSE, NSE or NIFTY50. Since the funds mimic a benchmark, it does not require active management by the fund manager. For this reason, passive funds have lesser management fees, known as expense ratio, when compared to the active funds.
There are different categories of mutual fund like equity funds, debt funds and hybrid funds.
Equity funds: This type of mutual fund scheme predominantly invests in equities. This means that the equity funds buy stocks of companies that are available in the market both in the home country or in the international market. These funds are also called growth funds. There are three types of equity mutual funds based on the share of the market that they own. These funds based on market capitalization are Large cap, Midcap and Small cap equity funds.
Debt Funds: A Debt mutual fund invests in debt instruments like corporate bonds, Government securities, treasury bills etc. which have a fixed income potential and gives an assurance of reasonable returns. Therefore, these are also called fixed income funds and are less risky than equity funds. Though the returns on these funds may not be as high as the equity funds, the debt funds are an ideal option for the investors who are looking for a steady income.
Hybrid Funds: Hybrid mutual funds invest a portion each in debt and equity holdings and therefore, have a mix of debt and equity features. These funds could have a fixed ratio or a variable equity and debt ratio. Investors can choose from mutual funds with a larger equity ratio or a higher debt ratio depending on their risk profile.
How to invest in a mutual fund?
To invest in a mutual fund, the investors can adopt two ways: the first is to invest as a lumpsum and the second is to invest in SIP. In a lump sum investment, investors just need to invest a sum of money once and leave it in the fund for value appreciation. When investors invest in SIP, they need to systematically invest a fixed amount regularly over a period of time in the fund of their choice.
Mutual Funds help the investors start on their investment journey and stay invested to realize their financial goals. There is a mutual fund for every type of investor who can easily invest in SIP and partake in their goals of capital appreciation, wealth creation, retirement planning or short to mid-term goals like buying a car, building an emergency corpus, or planning a holiday etc. The varied nature of investment and returns expected also make mutual funds an ideal investment vehicle for investors with a varied risk horizon.
A mutual fund advisor can suggest the best options to invest in SIP of a mutual fund that can be aligned to the financial goals of the investors.
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