How can mutual funds investments help you achieve your financial goals?

What are mutual funds?

Mutual funds are investment tools that accumulate money from investors in a pool that is invested to earn returns. The capital gains from the mutual fund investments are distributed to the investors on a pro rata basis. The mutual funds are managed by a fund manager who makes investment decisions and takes responsibility for earning profits by investing the unitholders’ money.

Since the mutual funds have a basket of holdings instead of holding one stock or debt instrument, there is an inbuilt diversification feature built into the funds. This is particularly beneficial to the investors as they do not have to spend time researching on different investment opportunities or involve themselves in active management of their funds.

Investments in mutual funds are fairly liquid with the exception of a few specialized funds like ELSS, gift funds etc where there are some lock-in periods. The funds in mutual funds can be redeemed at the prevailing NAV at the end of the business day.

Mutual funds are of different types and investors can invest in them as per their financial goals  Let us take a look at the types of mutual funds available:

Types of mutual funds

Mutual funds can be broadly classified into Equity, Debt and Hybrid Funds.

Equity Funds: These invest in stocks of companies and are also called growth funds owing to their potential to give high returns. But with high returns, also come high risks associated with the Equity mutual funds. There are many different types of equity mutual funds to suit every investors’ varied needs.

There are funds that are based on market capitalization like the small cap, midcap or large cap funds. Other funds could include those that are based on investment goals like the ELSS mutual funds that are specifically meant to help investors plan their tax saving benefits and invest the amount into equity for long term capital appreciation.  Other types of equity mutual funds could be pension funds, gift funds like children’s education funds, indexed funds, capital protection funds, tax saving ELSS funds etc.

Debt Funds: These mutual funds invest in debt instruments like corporate bonds, government securities, treasury bills etc which have a fixed income potential and give an assurance of reasonable returns. Therefore these are also called fixed income funds and are less risky than the equity funds. Even 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 investor profile.

As a footnote it can be said that the vast number of types of mutual funds make them an ideal and convenient option for investors. Mutual Funds help the investors start on their investment journey and stay invested to realize their financial goals. There is something for everyone, be it 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 for a portfolio that can be aligned to the financial goals of the investors.