Five types of mutual funds, know which is right for you before investing
There are five types of mutual funds, know which is right for you before investing. All of us save to meet our financial needs. While saving money can be used in emergency on one hand, it also saves you from the path of taking a loan. A man’s financial goals are retirement, children’s wedding, holidays, buying a house, buying a big car or starting his business. It takes money and time to complete them. If you give five to 10 years for this, then it will benefit you. According to Ajit Menon, CEO of PGIM India Mutual Fund, one needs to invest in different mutual funds to complete every kind of goal.
Although there are seven types of mutual funds, the most discussed are only five types of funds. These funds are equity funds, balance funds, index funds, debt funds, money market funds, guild funds and liquid funds.
1. Equity Fund
An equity fund is a mutual fund that invests primarily in stocks. It can be managed actively or passively (index funds). Equity funds are also known as stock funds. Stock mutual funds are primarily classified according to the investment style of holdings in company size, portfolio and geography.
2. Debt Fund
While equity mutual funds invest in public listed companies, debt funds invest in fixed-income securities of government and companies. These include corporate bonds, government securities, treasury bills, money market instruments and various other types of debt securities. Like a stock, investing in a company’s equity is like buying a stake for the growth of that company. But when you buy a debt fund, you give a loan to the issuing entity. Government and private companies issue bills and bonds to get loans to run their various programs.
3. Balance or Hybrid Fund
Balance funds are also known as hybrid funds. These are common stocks, bonds and short-term bonds. This fund is low risk and most of the invested capital is guaranteed to be safe. In this way one can say that this fund is profitable. Examples are aggressive balance funds, conservative balance funds, pension funds, child plans and monthly income plans.
This fund is considered the most secure fund. In this, the government invests all the money taken from the investors in government schemes. Since there is a backup of the government, there is no risk of money sinking.
4. Money Market Fund
These funds invest in short-term fixed income securities such as government bonds, treasury bills, bankers’ acceptance, commercial paper and certificates of deposit. These are generally a safe investment, but have slightly lower returns than other types of mutual funds. This fund is a safe fund, it is for those who also want the benefit of immediate investment.
5. Liquid Fund
Money under these schemes is mainly invested in short-term instruments. For example in T bills, CP etc. This fund is known for offering good returns on short-term investments. Growth Fund, with the help of this fund, tries to get the maximum benefit. Under this, investment is made in those companies which grow well in the market but the risk in this fund is high.
Why should you invest in a mutual fund
According to the Association of Mutual Fund India (AMFI), people should not invest in mutual funds but through them. To understand this, we invest in various investment avenues according to our needs like we invest in equity shares for capital growth, we invest in fixed income products for capital protection and regular income.
The concern for most investors is what would be the best tool for them? A person may not have enough abilities, time or interest to do research.
To manage investments, an individual can outsource for tasks that he or she is unable to do. Anyone can outsource ‘managing their investments’ from a professional firm-mutual fund company. Mutual funds offer different routes to meet different objectives which investors can choose based on their specific circumstances and objectives.
Mutual fund companies manage all administrative activities including paperwork. It also enables accounting and reporting of investment portfolio progress through a combination of Net Asset Value (NAV) and account statements.
Mutual funds are very convenient for those who need investment for their future needs. A team of professionals manages the money and investors can enjoy the benefits of their expertise without getting involved in their world affairs.