Are you new to the world of investing? You might have heard about mutual funds in and about, but you might be unsure what a mutual fund exactly is. A mutual fund is a professionally managed fund that pools the money of various investors and invests it in various securities.The benefits of mutual funds are innumerous and thus mutual funds have gained a lot of popularity in the recent past. Let’s look at some types of mutual funds to understand what suits your needs:
Types of mutual funds
Various types of mutual fund investments exist to cater to different needs of diverse people. Largely there are 6 types of mutual funds. These are:
- Equity or Growth Funds
These funds invest primarily in equities i.e. shares/stocks of the company. The main objective of these mutual funds is long-term capital growth. Equity funds invest at least 65% of their corpus in equity and equity-linked instruments. Such funds have the potential to generate substantial returns over time.
- Debt or Fixed-income Funds
Debt funds invest predominantly in fixed-income securities such as bonds, treasury bills, government securities, corporate debentures, and money-market securities. Since these investments are accompanied by a fixed interest rate and maturity date, it can be quite useful for passive investors seeking regular income with minimum risk.
- Money Market or Liquid Funds
These funds offer high liquidity and capital preservation with low-to-moderate returns. Such funds invest in mutual funds that are short-term and safer in nature, such as, Certificates of Deposit and Commercial Papers, Treasury Bills, etc. These funds have a maturity period of generally 91 days or less.
- Balanced or Hybrid Funds
Hybrid funds are an optimum mix of stocks and bonds low-to-moderate provide capital appreciation and stability of returns. These funds generally invest around 60% in equity and equity-linked instruments and the rest 40% in debt instruments like debentures and bonds. Examples include pension plans, aggressive balanced funds, child plans, etc.
- Index Funds
These funds invest in securities that aim to track and mimic a particular index on the stock exchange such as the BSE Sensex or the Nifty-50. These mutual funds typically have lower costs than actively managed funds. This is because the fund manager doesn’t have to do much research and put in much efforts to make investment decisions. The returns are more or less similar to the index that it tracks.
- Tax-saving Funds
Tax-saver mutual funds or Equity Linked Savings Scheme, commonly known as ELSS funds are a popular investment avenue among investors. These funds invest at least 80% of its corpus in equity and equity-linked securities. ELSS mutual funds offer tax deductions up to Rs1.5 lakhs u/s 80C of the Income Tax Act, 1961. You can invest in ELSS either via Systematic Investment Plan (SIP) mode or lumpsum mode.
You should choose a mutual fund that best serves your interests. Always keep your financial goals, risk profile, and investment horizon in mind before finalising the right set of mutual fund investments for your portfolio.You can also invest in mutual funds online at the comfort of your couch. Happy investing!