Are you planning to invest in mutual funds? It is important you know about its benefits, risks, the types of mutual funds and the best time to invest in it before you proceed. A piece of information that could ease your stress over financial matters - mutual fund is known to be one of the best investment avenues in India.
Mutual funds make investing easier for you. Each fund is designed to fulfill different goals. This is particularly useful for people who do not have the time or patience to research and choose wisely. Now read on to know if you are planning in the right direction.
What are mutual funds?
A mutual fund is formed when capital collected from different investors is invested in company shares, stocks or bonds. A mutual fund is managed collectively to earn the highest possible returns and the person driving this investment vehicle is a professional fund manager.
Investing in mutual funds is considered to be the easiest means to grow your wealth, which is why it is extremely important to consider the fund manager’s expertise before you move ahead.
All mutual funds are registered with SEBI (Securities Exchange Board of India) and therefore, are quite safe.
What are the types of mutual funds?
Broadly, the mutual funds can be classified into three categories that are based on the investment traits and the risks involved
1. Equity Fund
Equity funds aim to generate high returns by investing in the shares of companies of different market capitalization. They generate higher returns than debt funds or fixed deposits. Based on the shareholdings, the amount an investor can make is an important factor deciding the company performance in terms of profit or loss
Who should invest in Equity Funds?
Your goals, investment horizon and tolerance towards risk are some of the basic factors that decide if you should invest in equity funds. Equity funds are generally better if you have a long-term goal (say, 5 years or more). This will give the fund ample time to ride out the market fluctuations.
2. Debt Fund
Buying a debt instrument is similar to providing a loan to the issuing entity. A debt fund invests in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments. The basic motive behind investing in debt fund must be to earn interest income and capital appreciation.
Who should Invest in Debt Funds?
Debt funds try to optimize returns by diversifying across different types of securities. This allows debt funds to earn decent returns. There is, however, no guarantee of returns. The returns of debt fund often fall in a predictable range. This makes them safer avenues for conservative investors. These are also suitable for people with both short-term (3 months to 1 year) and medium-term (3 years to 5 years) investment horizons.
3. Hybrid Fund
Hybrid funds invest in both debt instruments and equities to achieve maximum diversification and assured returns. A perfect blend! The choice of a hybrid fund depends on your risk preferences and investment objective.
Who should invest in Hybrid Funds?
Hybrid funds are regarded as safer bets than pure equity funds. These provide higher returns than pure debt funds and are a favourite among conservative investors. Budding investors who are eager to take exposure in equity markets can think of hybrid funds as the first step. As these are an ideal blend of equity and debt, the equity component helps to ride the equity wave.
At the same time, the debt component of the fund provides a cushion against extreme market turbulence. In that way, you receive stable returns instead of a total burnout that might be possible in case of pure equity funds. For the less conservative category of investors, the dynamic asset allocation feature of some hybrid funds becomes a great way to milk the maximum out of market fluctuations.
What are the benefits of mutual funds?
a. Expert money management
b. Lock-in period
d. SIP option
e. Flexibility to switch funds
f. Investments based on goals and focus sector
h. Flexibility in terms of tenure
k. Spoilt for choice
l. Effortless trading and transaction
m. Tax efficiency
n. Safe and secure in every sense
o. Easy to monitor and make informed decisions
What is the best time to invest in mutual funds?
Availability of funds, market conditions, desired duration of investing and expected returns are some of the factors that decide if you should invest at a particular time. The best time to make a mutual fund investment is when you have money. This, however, does not imply that funds are expensive. Other than this, the rise and fall of the stock market can also influence one’s decisions.
How to invest in mutual funds?
The technology has made access to mutual funds a cakewalk. You may invest in mutual funds using any of the below options.
a. Direct Investment
Investors can directly contact fund houses to apply for a scheme and save on brokerage. All you need to do is to get the form from the nearest branch of the fund house or download it online. Do take care to go through the fine print and clear all your queries before deciding.
b. Investment via agents
There are sales professionals who guide potential customers on the different fund options. You can choose one based on your income, investment goal and risk profile. The agent can help you with applications, redemption, transactions and cancellation among others. Agents charge commissions for their services that you should be aware of before finalising to work with them.
c. Online Investment
Buying/selling a mutual fund unit online is almost the norm today. This not only saves time and effort but also makes it easy to compare funds and make informed decisions. Go to the portal, enter your details, make online payment and you are done.