Types of Mutual Funds and How to Invest in Them

If you wish to invest in the markets but do not have sufficient knowledge or resources, a mutual fund is the way to go. Mutual funds offer you an easier way to invest in the market without any need to directly monitor or manage the investments on a regular basis. Basically, it is nothing but a pool of funds contributed by a number of investors with an Asset Management Company (AMC) which assigns a fund manager to invest it in stocks, bonds or money market instruments for commensurate returns.

The beauty of this investment option lies in the fact that you can start by investing as little as INR 1000 and have a professional fund manager allocate the accumulated pool of funds in suitable stocks or securities to create a diversified portfolio of investments. So, you get to have a slice of the profits from some well-performing stock by investing a relatively small sum of money. Additionally, mutual funds offer periodic dividends based on performance of the funds.

Before investing, you need to know all about different types of funds which offer you the option of investing in a variety of financial instruments and get proportionate returns based on the size of your funds. These are explained below:

1. Equity Mutual Funds:

If you wish to invest solely in company shares, equity-based fund is the perfect choice for you. It offers the option to invest in a selection of stocks to create a balanced portfolio with lesser risk as compared to directly investing in equities because this fund would be managed by professionals. However, since equity-based funds have a higher risk-reward potential, you should think carefully before opting for it.

2. Debt Mutual Funds:

In this option, funds are allocated solely in debt instruments including bonds and commercial paper among other things. It has a low-risk profile and offer regular returns. This is the right choice for investors whose first priority is to protect their investments. However, the returns are not as attractive as in equity-based funds.

3. Money Market Mutual Funds:

These are also known as liquid funds which seek to invest in short-term debt instruments like certificates of deposit, fixed deposits and treasury bills. This option is best for those who prefer higher liquidity and protection of capital over higher returns involving a higher level of risk.

4. Gold Funds:

Gold has been an investment option for millennia and its value has only grown in modern times because of its viability as an investment during periods of financial inflation or when markets are not performing well in general. Traditionally, people have directly invested in gold for all its advantages but with gold funds you can choose to invest in gold through Gold ETF (Exchange-Traded Funds). This lets you avoid the risk of theft or damage associated with investing in physical gold. Gold funds might also invest in shares of companies involved in gold mining.

You can choose the type of fund which suits your requirements or opt for a balanced fund instead in which funds are allocated in both equity and debt instruments to reduce the risk level to an extent and still gain from high-performance equities. It is important to read the offer document carefully before investing in mutual funds and choose your Asset Management Company (AMC) with discretion to avoid any issues later.

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