Mutual funds have been gaining a lot of traction due to their amazing returns and easy investments. If you are also planning to get into this investment option, here’s everything you need to know!
What Are Mutual Funds?
Let’s help you understand this easily. Mutual funds, much like the name suggests, refers to multiple people mutually pooling their money together and then investing the collected sum in different areas. The collected sum is the mutual fund often managed by professional fund managers who have in depth knowledge about investments. They will invest the fund into different small companies thereby growing the fund as a whole and profiting everyone who has invested in it.
Types of Mutual Funds
There are different types of Mutual funds that are primarily defined by the types of companies the funds are invested in. Let’s take a quick look at these types:
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Equity Mutual Funds
These are the mutual funds that invest in stocks and equity shares from other companies. Equity Mutual funds are further subdivided into different categories. Starting with Large-cap funds wherein the fund is invested in top 100 companies as per the market capitalization. Then there are mid-cap funds which invest in companies that are ranked from 101-250 in the market cap; and finally small-cap funds – investing in companies ranked lower than 250 on the market.
Other than these, mutual funds are also divided based on Sectors such as a fund only investing in banks, pharma, IT companies, etc. Lastly there are Flexi/multi-cap Funds which can be invested in any of the above categories, even in international stocks.
2. Debt Mutual Funds
In simple terms, this is a way to invest your funds by lending it to a person who will pay interest to you. So debt funds aim to invest in safer low-risk options such as government bonds, corporate deposits, etc. These are further divided into subtypes such as the Liquid funds which require a short term investment, short duration funds that require a comparatively longer duration of investment, corporate bond funds that only invest in corporate bonds, gilt funds that only invest in government securities, and finally there are Dynamic Bond Funds wherein the fund managers get liberty to change the maturity duration period of the mutual funds based on the returns.
3. Hybrid Mutual Funds
This is a combination of points 1 and 2. Yes, a mutual fund that combines equity stocks and Debt Funds. These funds are a great choice if you want to balance your risk and return ratio.
It is subdivided into Aggressive Hybrid Funds (investing majorly into equity), Conservative Hybrid Funds (investing majorly in debt), and Balanced Advantage Fund (auto-switch between equity and debt as per the market conditions)
4. Index Funds
There are different funds linked to various indices across the world. These are part of the Index Funds. What these funds so is they have a planned index of a set number of companies and a planned percentage of investment for each company. There is no decision maker or fund manager for Index Funds. The fund automatically invests in the listed companies in the pre-decided percentage. This is an appropriate fund to invest for a beginner as it already has a diversified portfolio and it does not require active market tracking or research.
5. Mutual Funds for Saving taxes
This one’s for you if you’re looking to save on taxes. It is a mutual fund that will invest your money in stocks and also help you in saving on tax. Generally it has a lock-in period as it ensures long term capital formation and qualifies for various tax benefit depending on your citizenship and country. As your money is invested in the stock market it also guarantees consistent returns.
6. Fund of Funds (FoF)
If you can’t decide which mutual fund to invest in, here’s your pick! Fund of Funds breaks your money and invests it into multiple funds instead of directly investing in equity or debt. Seems pointless? Think of it this way – each Mutual Fund already has a diversified portfolio of companies to invest in, now you have a fund which is going to break down your money and invest it in multiple diverse mutual funds resulting in more diversification and in turn more chances of profit!
Remember that the key is diversification so that your risk and returns are balanced. However, too much diversification can lead to a diworsification! So ideally limit investing in one good FoF at a time.
5. International Mutual Funds
Lastly, International Mutual Funds allow you to invest for global brands and companies offering a great level of exposure. Investing globally comes with its own pros. You no longer need to rely on a specific local market’s behaviour. You get the currency advantage if you are directly dealing in foreign currencies and you get access to globally competitive brands such as Apple, Microsoft, Meta, etc.
Ways to Invest
Just as there are different types of mutual funds, there are different ways in which you can invest in them. Here’s how:
- Direct Plan – invest directly with the mutual fund house without any middlemen or broker (you can do this through any investment app. If a plan has ‘direct’ in its name, it means you are investing directly)
- Regular Plan – invest with the help of an advisor or distributor (usually commission based)
- Lump Sum vs Monthly Plan – Either investing a large sum of money at once or going for smaller installments with monthly plans
Many different applications have gained traction as investment platforms. You can easily begin an investment journey in just a few clicks using these apps. Most of these apps act as distributors which means you will be investing using the Regular Plan. However, the same apps also have options to invest by monthly investments and Direct plans.
Conclusion
Now that you are all caught up on the different types of mutual funds and ways to invest in them, it’s your turn to find your perfect pick and start investing!
