A mutual fund can be defined as a collection of investments. These investments are owned by a group of individuals and are professionally managed by fund managers. The investment objective of the funds determines the types of securities it invests in. Investors invest in mutual funds by purchasing the shares or units of the fund. As more investors invest, the fund issues new shares. Investors must make investments into these funds by evaluating their investment goals as well as the fund’s investment objectives.
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Types of Mutual Fund:
Mutual funds can be categorized into different types based on factors such as structure, asset class, and investment objective and based on risk. Here we will try to analyze mutual funds based on asset class:
-Debt Fund: Debt funds are those that invest in low-risk debt instruments. When compared to equity fund these are a much safer investment option. You can invest your money in debt securities such as government bonds, fixed income assets, and company debentures. You can expect fixed returns by investing in such assets. You do not need to pay TDS, but if your earning from these investments is above Rs. 10,000 then you have to pay taxes as applicable.
-Equity Fund: Mutual funds that mainly invest in equities or company shares are known as equity mutual funds. They are also known as stock funds. The size of these funds is evaluated based on market capitalization. These are ideal investment tools for investors who want to generate extraordinary returns on their investments. They are linked to the markets and include specialty funds that target sectors like hospitality, infrastructure, banking, and fast-moving consumer goods.
-Hybrid Fund: These mutual funds invest in a mix of asset classes. In some of the hybrid mutual fund portfolio, the equity investments are higher than the debt investments and vice versa. The risk and the returns are balanced by investing in certain proportions of equity and debt securities.
If you are an investor who wants to invest in a mutual fund based on your risk-appetite then you must assess your investment needs. The first thing you need to understand how long you can remain invested. The next step is to understand your investment goals. Do you want to build wealth quickly or over a long tenure? What type of investor are you?
If you want quick returns and are willing to take the risk then you should go for equity mutual fund investment as returns generated in such funds are the highest. For low-risk investments, you must go for debt mutual funds that offer capital safety with returns at a much lower risk.
Here are four factors you must keep in mind while choosing mutual funds:
Risk: The returns generated by the fund and the risk factor entirely depend on what asset class the fund invests in. You can lose money in mutual fund investments if the funds in your portfolio contain a high-risk factor.
See Also: Mutual Fund Returns
Past performance: You must assess the past performance of the fund before investing in it. Though it cannot predict the future performance of the fun, it can help you assess the volatility or risk associated with the fund returns.
Price to buy and sell: When you buy mutual funds you buy them at the fund NAV along with the sales charge. Make sure to sell your funds when its NAV is high. This will cover your purchase price plus fees and redemption charges. This way you will not have to incur losses when you redeem your units.
Fees: The expense ratio of mutual funds reduces your returns on investments. It is wise to check the associated fees and expenses while investing in mutual funds.
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