The middle class in India save for their future through financial planning and investing. They either deposit a portion of their monthly income into a bank account or opt for a mutual fund investment. The second option is popular because it has the potential to offer higher returns. However, before you invest in mutual funds you must know what they are.
What are mutual funds?
A mutual fund is an investment option in which an asset management company (AMC) pools money from a group of investors. The pooled funds are managed by a fund or portfolio manager. The fund manager invests the corpus in securities like bonds, gold, stocks, and other assets. Through this fund allocation, the fund managers try to provide potential returns. The returns are shared collectively by the investors based on the proportion of their contribution. However, it is important to note that you must not invest in mutual funds cavalierly. You must identify the investment mode, the investment amount, and your risk appetite. However, the most important thing to identify is the mutual fund variant that aligns with your financial goals and risk appetite.
What are the different types of mutual fund?
Different mutual fund variants have their own set of advantages and risk appetites. They are dependent on the Investment objective. Some of these types are:
- Equity funds
Equity funds are mutual funds that primarily allocate funds to the equity market. They invest in the stocks or shares businesses with the aim of providing long-term capital appreciation. Despite the high-risk level, equity funds may deliver high returns in the long run. The fund allocation in these funds is based on the market capitalisation of the businesses. Thus, according to market capitalisation, equity funds are classified into small-, mid-, and large-cap funds. These three different equity fund types have different levels of risk.
- Debt funds
Fixed-income securities, for example, government bonds, money market instruments, and corporate bonds are targets of debt fund investments. In contrast to equity funds, they generally involve comparatively lower risks. Moreover, these investments offer more stable returns and are suitable for short-term and medium-term investments.
- Hybrid Funds
Introduced in 1995, hybrid funds are known for investing in both equity and debt securities. They offer investors a balanced risk-return profile. Investments in hybrid fund investments rely on two things, namely, investment objectives and market conditions. If you are a moderate risk-taking investor, look no further than hybrid funds.
- ELSS funds
ELSS or equity-linked savings schemes allow you to claim tax deductions. You can claim tax deductions under Section 80C of the Income Tax Act, 1961. They primarily invest in equities and financial securities that are linked to equities.
Apart from the four above, several other mutual fund variants are available for you to choose from. Determining your risk appetite will help you to identify the mutual fund that aligns with your financial goals and risk appetite. After risk appetite, identify the investment mode of your choice. The SIP or systematic investment plan mode is recommended if you are new to the job market. You can invest in your mutual fund scheme regularly every month through SIP. For that, you must know the investment amount. Don’t panic if you don’t know your investment amount though. You can freely access an online SIP calculator.