Investment plans that provide higher returns are often associated with high risk. If you are a newbie to the world of investment and want to earn higher returns then you must be willing to take some risk. Mutual funds are for those who need someone else to manage and invest their savings wisely and professionally on their behalf. A mutual fund is formed when an Asset Management Company(AMC) accumulates investment from various individuals and other institutional investors with common investment objectives. There is a fund manager who professionally manages the collaborative investment fund by strategically investing in the capital assets to generate maximum returns for the investors. These fund managers are experienced professionals in the field of finance and have an in -depth understanding of market rates. The fund houses charge an expense ratio, which is the annual maintenance fee to manage investment of individuals. Also, before investing in mutual funds, one must be aware about the types of mutual funds available and henceforth can decide which one to invest in.
TYPES OF MUTUAL FUNDS:
- EQUITY FUNDS:
These funds basically invest the money pooled from investors in shares or stocks of different companies and hence they are also known as stock funds. The returns associated with these funds exclusively depends on the performance of the invested stocks in the stock market. These funds provide significant returns over a period and hence are associated with higher risk factors.
- DEBT FUNDS:
These funds basically invest in fixed income securities such as bonds, treasury bills etc. They also invest in diverse fixed income plans such as fixed maturity plans, liquid funds, short-term plans, long-term bonds and monthly income plans. These investments come with a fixed maturity period and a fixed rate of interest. Hence, it can be a good option for investors looking for a fixed income source with minimum risks.
- MONEY MARKET FUNDS:
Money market, also known as the cash market, is run by the government in association with the banks, financial institutions and various other corporations by issuing money market securities like bonds, treasury bills and certificates of deposits to others. The fund managers will invest your money and will pay regular dividends in return. Opting for a short term investment plan can minimise the risk of investment in such funds.
- BALANCED FUNDS:
As the name suggests, balanced funds are an ideal blend of bonds and stocks. They are also known as hybrid funds. They are the bridge between equity funds and debt funds. The ratio may vary. They take the best of the two funds. And are hence suitable for investors willing to take risks and at the same time get benefitted by steady income sources.
- SECTOR FUNDS:
As the name suggests, these funds invest in specific sectors only like banking, IT, pharma etc. These are theme based mutual funds. As they invest in specific sectors only the risk involved is higher as the returns on this investment exclusively depends on the performance of that specific sector over a period.
- INDEX FUNDS:
An index fund identifies stocks and their corresponding ratio in the market index and invests the money in the same portion in the same stocks. A fund manager does not manage it. These funds are not popular in India as they can’t surpass the market. But they play it safe by imitating the index performance. It is best suited for passive investors.
Online investment in mutual funds can be done through the official website or through an app. The offline mode is still available but the digital process is more easier and hassle-free. Every Asset Management Company has an official website you can find all types of mutual funds to invest in. You just have to fill the required information and complete the E-KYC and submit it. The submitted information is then verified and on successful verification, you can start investing. Same way, the Asset Management Company also allows investors to invest in mutual funds through mobile applications in a faster way.
Mutual funds investment may seem complicated and confusing at times. But doing some research and analysis before investing would help a lot. Your financial goals, budget, and the tenure plays a significant role in your investment. Analysing your financial goals is the first step towards the investment process. It will help you choose the right fund to invest in. Finalising the right fund is the second most important thing. One should analyse the fund manager’s credentials, expense ratio and portfolio components before shortlisting the fund. It is often advised to invest in balanced or debt funds at first as they come with low risk and provide significant returns. Consider evaluating your risk profile and if possible invest in more than one mutual fund so that if one fund doesn’t perform well, the other can compensate for the loss. Investing through the Systematic Investment Plans(SIP) is advised for those who invest in the equity funds for the first time. A lump sum investment can put you at the risk of catching a market peak, a SIP will allow you to spread your investments over time at different market levels. Keep your KYC documents ready before investing. Also, seek advice from a mutual fund expert if you find it difficult to choose the right fund.