Types of mutual funds and the way to invest in it

Mutual funds India provides a convenient way for investors to participate in financial markets, access professional management, and achieve diversification in their investment portfolios. However, like all investments, they come with their own set of risks, and it’s crucial for investors to understand the specific mutual fund they are investing in, their investment goals, and risk tolerance before making investment decisions.

To invest in mutual funds , one must know that they are categorized into several types based on their investment objectives and asset allocation. The most common types include:

Equity funds: These funds primarily invest in stocks or equities. They are suitable for investors seeking higher returns over the long term but are ready to accept higher volatility.

Debt funds: Debt funds invest in fixed-income securities such as government bonds, corporate bonds, and other debt instruments. They are considered lower-risk investments compared to equity mutual fund schemes and are suitable for investors looking for stable returns.

Hybrid funds: Hybrid funds, also known as balanced funds, invest in a mix of both equities and debt instruments. They aim to provide a balance between growth and stability.

Liquid funds: Liquid funds invest in short-term money market instruments such as treasury bills and commercial paper. They are ideal for parking surplus funds temporarily and offer high liquidity.

Tax-saving funds (ELSS): Equity linked savings schemes (ELSS) are tax-saving mutual fund investments that offer tax benefits under Section 80C of the Income Tax Act. They primarily invest in equities and have a lock-in period of three years.

Apart from some of the common categories of mutual funds, which are actively managed, there are some other funds which are passively managed mutual funds. Under passively managed funds, there are two types – ETF and index funds.

ETF or exchange traded funds are passively managed funds which track a market index and aim to replicate the return of that index. For example – a NIFTY 50 ETF fund will aim to replicate the performance of the Nifty 50 index. Nifty 50 Index represents the 50 largest companies listed on India’s National Stock Exchange (NSE).

Risks associated with mutual funds –

To invest in mutual funds, one must be aware of the following risks associated with it –

Market risk: The value of mutual fund investments can fluctuate based on daily market movements.

Liquidity risk: Although most mutual funds are liquid, certain ETF funds which does not have much liquidity on the exchanges, may not be sold when you want it.

Credit risk: Debt funds are exposed to credit risk if the issuer of the bond defaults on interest or principal payments. Therefore, investors must check the risk profile of the debt fund before investing in it.

How to invest in mutual funds –

Here is a simple guide on how to invest in mutual funds –

Choose an investment platform: Investors can buy mutual fund schemes through various channels, including asset management companies (AMCs), banks, and online mutual fund platforms or mobile apps.

KYC (Know your customer): Complete the KYC process by submitting necessary documents, such as identity and address proof, if you are not already KYC compliant.

Select Funds: Determine your investment goals and risk tolerance. Choose mutual funds that align with your investment objectives.

Way to invest: You can invest in mutual funds by purchasing units either through one-time investment or systematic investment plan, depending upon your cash flow situation.

Monitor and review: Keep an eye on your investments and review your mutual fund portfolio periodically to ensure it remains aligned with your goals.

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