Many people want to invest in Mutual Funds but are not aware of how do they work. Of course, they see ads on televisions that say that “Mutual fund investments are subject to market risk, please read offer-related documents carefully before investing”. With this sentence, they are hesitant about whether they will lose their money. Being a traditional nation, most people feel that investing in banks will be a safe option for them. When they get complete knowledge on how mutual funds work, they will truly come forward to invest.
But before investing in Mutual Funds one should know, what is Mutual Funds?
Mutual funds primarily consist of a corpus of money that has been pooled by some investors. This money is further invested in a variety of asset classes ranging from shares and stocks to bonds and securities.
There are several types of Mutual Fund schemes – Equity, Debt, Money Market, Hybrid, etc. And there are many Mutual Funds in India managing several hundreds of schemes amongst them. You should always remember that you are choosing mutual funds to achieve your financial goals. So, choose a mutual fund scheme based on your goals, time in hand to achieve the goals and your risk profile.
Below are the Asset classes which will help in setting your Financial Goals and analyzing the risk.
A. Equity Funds
These funds primarily invest in the equities or shares of various companies. Since they tend to reap high returns, they are generally considered to be high risk.
B. Debt Funds
These funds invest in multiple debt instruments including fixed income assets, debentures, and government bonds. They are considered to be safe funds because, despite the market fluctuations, their returns are set.
C. Hybrid Funds
Also referred to as balanced funds, they usually invest in different asset classes, irrespective of the proportion of debts and equities involved. This ensures that the risks and returns remain in sync, thus striking a perfect balance.
D. Money Market Funds
These funds invest in short-term liquid instruments like Treasury bills. They are considered to be risk-free as the returns, though moderate, are almost immediate.
E. Sectoral Funds
Just as the name suggests, sectoral funds make investments in well-defined market sectors like infrastructure, real estate, or finance. The returns on these funds are entirely dependent upon the performance of that specific sector.
F. Index Funds
To simply put it, index funds are equivalent to buying shares from listed exchanges like BSE or NSE. The returns vary with the movement of the index and are thus subject to market swings.
G. Tax-Saving Funds
The primary purpose of these funds is to enable an investor to claim tax deductions specified under the Income Tax Act. With this in mind, they solely invest in tax-saving schemes.
H. Funds of Funds
Instead of investing in bonds or securities, the funds of funds invest in other mutual funds. The returns received depend upon the performance of the fund being invested in.
| Common Goals | Most suited mutual fund scheme category | Investment Horizon |
| Retirement | Equity diversified mutual funds, sector or thematic funds | Long term |
| Tax Plan | Equity Linked Saving Scheme | Medium |
| Child’s Education and Marriage | Balanced funds, indexed funds, gold funds | Long term |
| Saving for an overseas holiday, buying a car next year, or saving for home renovation in one or two years | short-term gilt funds, short- to medium-term debt funds | Short term |
| Regular Payouts | SWP in Mutual Fund schemes | Medium to short term |