The Types of mutual Funds and How to Invest in Them

If you want to invest in the markets, but do not have enough knowledge and resources, a mutual fund is the way to go. Mutual fund offers an easier way to invest in the market without the need to monitor or manage the investments on a regular basis. Basically, it is nothing but a pool of funds contributed by a number of investors with an Asset Management Company (AMC), which affects a fund manager to invest in stocks, bonds or money market instruments corresponding to the returns.

The beauty of this investment option lies in the fact that you can start by investing as little as INR 1000 and a professional fund manager to allocate the accumulated pool of funds in shares or securities to create a diversified portfolio of investments. So, you get to have a slice of the profits of a few-running-of-stock by investing a relatively low sum of money. In addition, mutual funds offer periodic dividends based on the performance of the fund.

Before you invest, you must know everything about the different types of funds which offer you the opportunity to invest in a variety of financial instruments and get proportionate returns based on the size of your fund. These are explained below:

1. Investment Funds:

If you want to invest only in the shares of the company, equity fund is the perfect choice for you. It offers the opportunity to invest in a selection of stocks to create a balanced portfolio with less risk compared to investing directly in shares, because the fund would be managed by professionals. However, since the equity-based funds have a higher risk potential return, you should think carefully before opting for it.

2. Debt Mutual Funds:

In this option, funds are allocated solely in debt securities, including bonds and commercial paper, among other things. It has a low risk profile and deliver consistent returns. This is the good choice for investors whose first priority is to protect their investments. However, the yields are not as attractive as in the equity fund.

3. Money Market Funds:

These are also known as liquid funds which seek to invest in short-term debt instruments such as certificates of deposit, fixed deposits and treasury bills. This option is best for those who prefer more liquidity and protection of capital over the higher yields involving a higher level of risk.

4. Gold Funds:

Gold has been an investment option for millennia, and its value has only grown in modern times, due to its viability as an investment during periods of financial inflation or when markets are not efficient in general. Traditionally, people have directly invested in gold for all of its benefits, but with gold funds, you can choose to invest in gold through Gold ETF (Exchange-Traded Funds). This allows you to avoid the risk of theft or damage in connection with the investment in physical gold. Gold fund may also invest in stocks of companies involved in gold mining.

You can choose the type of fund that suits your needs, or opt for a balanced fund instead, in which funds are allocated in equity securities and debt instruments to reduce the level of risk to the extent and still obtain high performance of the shares. It is important to read the offer document carefully before investing in mutual funds and choose your Asset Management Company (AMC) with discretion to avoid problems later.

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