When it comes to investment decision most of the youngsters prefer to invest the funds in mutual funds. In this article i discuss to you about what is mutual funds and how to invest in mutual funds. Also in this we discuss about 7 common types of mutual funds.
What is Mutual Fund?
To many people, Mutual funds can seem complicated. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people is what makes up a mutual fund. This fund is managed by a professional fund manager.
It is also a trust that collects money from a number of investors who share a common investment objective.Then, it invests the money in equities, bonds, money market instruments and also in other securities.
In other words:
“A mutual fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a basket of securities at a relatively low cost.”
Before you invest, understand the funds investment goals and make sure you are comfortable with the level of risk. Even if two funds are of the same type, their risk and return characteristics may not be identical.
You may also want to speak with a financial advisor to help you decide which types of funds best meet your needs.
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How to Invest in Mutual funds?
Before you decide to invest in a mutual fund, it is important to keep the below points in mind. Doing so will help you choose the right kind of funds to invest in.
Mutual fund investment are becoming very popular with individual investors. Because of the benefits they provide. Some of most important advantages of mutual funds are:
- Start with any amount (as low as 500).
- Start automated monthly investment (SIP).
- Invest without requiring to open DMAT account.
- Diversify across multiple account and also other instruments like debt, gold etc.
Simple steps to invest in Mutual Funds online
Firstly,Understand your risk capacity and risk tolerance. This process of identifying the amount of risk you are capable of taking is referred to as risk profiling.
Secondly, the next step is asset allocation. Once you identify your risk profile, you should look to divide your money between various asset classes. Ideally your asset allocation should have a mix of both equity and debt instruments so as to balance out the risks.
Thirdly, You can compare mutual funds based on investment objective and past performance.
Then, Decide on the mutual fund schemes you will be investing and make the application online or offline.
Lastly, Diversification of your investments and follow-ups are important to ensure that you get the best out of your investment.
know about the Types of mutual funds and start your investment in it and save money for your future.
Top 7 Common Types of Mutual Funds
There are many types inn Mutual funds. Let’s discuss in detail for better experience.
1. Money Market Funds
These funds invest in short-term fixed income securities. such as commercial paper, treasury bills, government bonds etc. These funds are generally a safer investment, but with a lower potential return then other types of mutual funds.
Canadian money market funds try to keep their net asset value (NAV) stable at $10 per security.
2. Balanced Funds
These funds invest in a mix of equities and fixed income securities. They also try to balance the aim of achieving higher returns against the risk of losing money.
Most of these funds follow a formula to split money among the different types of investments. They tend to have more risk than fixed income fund, but less risk than pure equity funds.
Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.
3. Index Funds
Index funds are ideal for investors who want to invest in equity mutual funds. But at the same time don’t want to depend on the fund manager. an index mutual fund follows the same strategy as the it is based on.
For example, if an index fund follows the BSE index as the replicating index. And if it has a 25% weightage in let’s say stock A, then the index fund will also invest 25% of its assets in stock A.
Index funds promise returns in line with the index they mirror. This fund is important or suitable for investors with a medium risk appetite.
4. Fixed Income or Debt Mutual Funds
These funds invest a majority of the money in debt- fixed income. For example, fixed coupon bearing instruments like government securities, bonds, etc.
They have a low-risk low-return outlook and are ideal for investors with a low risk appetite looking at steady income. However, they are subject to credit risk.
5. Hybrid / Monthly Income Plans (MIP)
These funds are similar to balanced funds but the proportion of equity assets is lesser compared to balanced funds. Hence, they are also called marginal equity funds.
They are especially suitable for investors who are retired and want a regular income with comparatively low risk.
6. Specialty Funds
These funds focus on specialized mandates such as real estate, commodities or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights. And also may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.
7. Equity Funds
These funds invest in stocks. These funds aim to grow faster than money market or fixed income funds. so there usually a higher risk that you could lose money.
You can choose from different types of equity funds including those that specialize in growth stocks, income funds, value stocks, or combination of these.
Benefits of Starting Mutual Funds
- It’s easy to get started.
- Invest in small amounts.
- You also can begin with whatever you can manage.
- It’s the least you need to read up on.
- You can use them for almost every investing time frame.
- There is a type of every goal.
- The “smartest” way to create wealth.
- You also can get a return better than what your bank gives you.
Finally, if you are interested in invest in mutual funds online. The Groww app is best for mutual funds investment. Hope this article is very useful to you for understand mutual fund basics.
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