What Type of Mutual Fund Should I Invest in?

Investments are everybody’s goals – reserving a certain amount of capital or income on a financial instrument or a property in the hopes of returns for a high or stable income attracts attention from top corporations to your next-door neighbor. When you possess enough money, it is only a matter of the right choice, however with smaller amounts, it is a hurdle that requires to be overcome via the novel method of mutual funds. 

What are Mutual Funds?

Mutual funds enable investors, mostly individuals, to invest in a comprehensive list of instruments through a pooling of capitals alike and distributing them over those instruments as requested such as government securities, money market instruments, gold, and whatnot. Since such funds are managed by an asset management company, they also receive corporate-level professional service for such management as well.

What are the types of Mutual Funds?

Types of mutual funds divide into two in their simplest attributes as in their maturity time. Open-ended funds do not force an investor to enter or exit a mutual fund at specified dates – these are freely accessible. In contrast, close-ended funds require investors to enter during only NFO periods and exit after the maturity time.

Common types of mutual funds according to their content are as follows:

Equity funds, which are also known as growth schemes, are quite common among investors looking to trust their money with stock markets. Provided that you can afford to keep your investment for the long run, these high-risk class funds are able to come back home with a lot of returns. Especially when you have gathered your primary amount of savings to purchase mutual fund shares, equity funds can help you build the portfolio needed later on. To reduce the risks, these funds are distributed over several sectors. Also, there are further three sub-categories of equity funds. Sector-specific investments in mutual funds focus on particular sectors such as construction, mining, energy etc. Since they have a narrower sector gamut, higher risks are possible later on. Another type of equity mutual fund is index funds which give more control over your funds by mirroring the index of your choice at the percentage of weightage determined. There are the tax-saving funds as well which, as the name implies, helps with the taxes of the investors but have a lock-in period that needs to be met.

What is a Liquid Fund?

A money market, or liquid fund as most know it, is a short-term-oriented fund. People who are looking to park overheads of their income somewhere safe and moderately profitable prefer these mutual funds as they pose a low risk and are similar to savings bank accounts.

When most of the funds go into fixed coupon-bearing instruments such as bonds, government securities etc. from a vantage point of low-risk-low-return, they are called fixed income or debt mutual fund investments which are ideal for maintaining a steady income.

Investors who are looking for a mutual fund that does a bit of both equity and liquid funds prefer balanced funds that moderate the risk and returns in favor of the capital owner.

When balanced funds consist of a lesser amount of equity funds, they are called hybrid funds or monthly income plans. Especially pensioners with a low-risk appetite prefer mutual funds for they provide a reasonable extra income.

Lastly, the mutual funds that invest in government securities only but none of the credit risk normally involved are called gilt funds. The downside is that gilt funds are prone to high-interest rate risk.

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