Mutual funds are versatile and can fit into any investing style. That’s because there are different types of mutual funds in the market. Each mutual fund serves a different purpose. These funds vary in their investment objective, risks, returns as well as taxation. The wide range of mutual funds, therefore, helps you invest in the right fund. Therefore, it is important you understand the different types of mutual funds. It can help you make the right decision. So, let’s enlist the different types of funds for a better understanding of the mutual fund market.
Mutual fund categories
On a broader level, mutual funds are categorized as equity and debt funds. A mix of the two is known as a hybrid fund.
▪ Equity funds
Equity funds mainly invest in stocks of companies. There are various types of equity funds available in the market. They are:
✓ Diversified equity funds: Diversified equity mutual funds are pure equity funds which spreads your invested money across various sectors and companies regardless of their market capitalization.
These are multicap funds and are suitable for a moderate risk-taker. Staying invested for five to six years may deliver potential returns. However, study the fund’s past returns and its objective before investing.
✓ Sector funds: Such funds invest in one particular sector. For example, Banking and Financial Service Fund invests in banking and financial services sector only.
Sector funds can be a good choice for long-term investing. However, this entails higher risk. So, before you invest, it is important to study the sector and analyse how it may outperform the market in future.
✓ Equity-linked savings schemes(ELSS): These are the tax-saving mutual funds that qualify for deduction under Section 80C of the Income Tax Act. Although ELSS funds come with a lock-in period of three years, using the SIP route can make such investment affordable.
✓ Hybrid funds: These are balanced funds that invest in both stocks and bonds. They are considered equity-oriented funds as they invest at least 65% of total money in equity. These are good investment options for beginners.
▪ Debt funds
Debt funds are mutual funds that principally invest in debt instruments like bonds, treasury bills and other fixed income investments. These funds can be further categorized:
✓ Income funds: These funds majorly invest in fixed-income instruments like bonds, government securities and corporate debentures etc. The major focus is on income generation.
It’s important to consider the interest rate. That’s because interest rate volatility has an impact on these funds. Investing during a falling interest rate scenario and exiting when rates tend to rise can benefit you in such funds. If you have one to three years’ time frame in mind, these funds can be a good option.
✓ GILT funds: These funds majorly invest in government securities. Generally, these funds are safe since there is no default risk. However, gilt funds are subjected to interest rate risk. For example, if the interest rate moves up, the yield of a GILT fund goes down as it becomes less attractive and vice versa. Thus, you need to keep a track on the interest rate movements.
✓ Short-term funds: These funds primarily invest in money market instruments like treasury bills and certificate of deposits. The average maturity of such papers are low and the investment is thus suitable for a short-term horizon like three to six months.
✓ Monthly income plans (MIPs): These are debt-oriented hybrid funds with a small allocation in equity and a majority of the investment in debt. MIPs usually pay a monthly dividend. Investors with low to moderate risk profile can consider this as an option in order to receive a regular income. But do remember that the monthly dividend is not a guarantee.
✓ Liquid funds: These invest in short-term debt instruments like commercial papers, treasury bills and corporate deposits. These are a good short-term option.
Now that you know how different mutual funds work, you can choose to invest based on your needs.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Myths about fixed income investments
Fixed income investments are a popular investment choice for many risk-averse investors. Fixed income investments provide stability by offering an assured income along with capital protection. However, there are certain myths that surround these investment options. It is pertinent you pick the right bones before you invest. Separating the wheat from the chaff is of key essence here. So, let’s look at some of the fixed income investments myths that bog fixed income instruments down. In the myth busting pointers below we help clear the air for you.Myth 1. Fixed income investments are risk-freeReality: Fixed income instruments are considered as risk-free. However, they do carry a certain degree of risk. For example, bonds and debt funds are subjected to credit risk and interest rate risk. Corporate deposits are subject to liquidity risk. Hence, it’s important to consider various things like consistency in returns, debt-equity ratio and credit ratings of the issuer when assessing fixed income investments. Also, if you are investing in debt funds, take a look at underlying instruments of that fund. If the fund manager invests in debt instruments that have poor ratings, getting out of the fund during an emergency could get difficult.Myth 2. Fixed income investments are solely for income generationReality: Along with income generation, fixed income investments also offer an opportunity for growth. For example, convertible bonds have an equity component for growth. There are other products like debt mutual funds and convertible bonds as part of fixed income investments in India that provide growth opportunity as well. Myth 3. Increasing interest rates are bad for bondsReality: Generally, bond prices go down with a rise in interest rates. And this is what makes people assume that rising interest rates are bad for bonds. But, the rising interest rate scenario could work in favour of some bond investors. The impact of rising rates depends on the investor’s time horizon or how long an investor wants to hold the particular bond investment.For example, you invest in a bond fund for the long-term. Over the period of time, value of the bond fund can recover even in if the interest rate rises. That’s because your fund manager rebalances the portfolio on a regular basis. Myth 4. Fixed income investments are for retirees or those nearing retirementReality: Debt-oriented options should be a part of your portfolio. That’s because it helps diversify the investments you have. For example, if your equity investment doesn’t do well, you can rely on your debt investment to help you out. Debt investment is needed to stabilize and balance the overall investment portfolio.Thus, it is the combination of equity and debt investments that is vital for building a healthy investment portfolio for fulfilling long-term financial goals. In addition, tax free fixed income investments such as ELSS can also ensure you build wealth while at the same time you also receive tax exemptions.Fixed income instruments can be an excellent way of receiving almost-assured steady income, and securing your capital. However, like every financial investment, a lot of data out there could be bad and inaccurate as much as there is genuine information. Based on the kind of fixed income assets you are evaluating, you could be working on misconceptions and that could cost your hard earned money. As the above mentioned points show, every fixed income investments is unique. Each one has its set of risks and opportunities that you need to consider. Look into your goals and time frame to invest in the exact type of fixed income investment for your future. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Why start investing in mutual funds
Mutual funds have been shining brighter by the year in the country. But you may wonder why invest in mutual funds? The answer is simple: they are considered to be the ideal investment option for people not well-versed with the world of finance. You don’t need deep pockets to invest in them either. In this article, we look why invest in mutual funds makes sense. To start investing in mutual funds you need to know the reasons in detail as to why mutual funds can be an ideal option, especially if finance is not your forte.✓ Convenient It’s easy to get started with mutual funds. There are many fund houses that offer online facility to invest. Unlike demat accounts for stocks, there is not much paperwork involved in mutual fund investments. Systematic investment plan (SIP) by mutual funds is a convenient investing option for beginners. In systematic investment plan, money will be directly debited from your account on a monthly basis towards fund investment. It’s that simple. Along with offering convenience, it also inculcates a habit of investing. ✓ Affordable There are many investors who step away from stock markets because they lack capital. However, mutual funds are affordable. You can start with as little as Rs.500 a month. The best part is that it gives you an opportunity to invest in a wide variety of stocks at a minimum account. Unlike direct equities, mutual funds offer you a maximum exposure at a minimal cost. ✓ Diversification Mutual funds can help diversify your investment across various asset classes like equity and debts. Unlike individual stocks which are risky, equity mutual funds diversify the risk by investing in stocks of various companies across various sectors. For example, a balanced fund invests your money in both equity and debt instruments. This means that even if your equity investment isn’t doing too well, you can rely on your debt investment to get a return on investment. Therefore, diversification can help reduce risk along with optimizing returns. ✓ Liquidity Mutual funds are highly liquid, meaning they can be bought or sold easily. Except tax saving schemes like ELSS (Equity Linked Savings Scheme), mutual funds don’t have a lock-in period. Further, mutual funds also offer liquidity by providing facilities like systematic withdrawal plans (SWPs) and systematic transfer plans (STPs). While STPs afford you the flexibility to move from existing fund to better performing fund, SWPs allow you to withdraw a fixed amount from your invested fund at fixed intervals. ✓ Professional management Mutual funds are managed by professional managers and experts who are in tune with the world of finance. Unlike with direct stocks, which needs you to do a lot of research, mutual funds reduce your burden by leaving this job in the hands of fund managers. Stock picking, tracking their performance and rebalancing if needed are done by fund managers. ✓ Competitive returns Above all, mutual funds can offer ‘higher returns’ when compared to many other investment options. After all, everyone’s objective is to maximize their income. For example, debt funds have consistently delivered better returns than traditional bank deposits. ✓ Transparency Mutual funds provide operational transparency. Net asset value of funds are declared and published on a daily basis. Mutual fund houses issue monthly fund factsheets that provide you details of portfolio holdings along with its performance. ✓ Regulated industry The mutual fund industry is regulated by the Securities and Exchange Board of India (SEBI), a non-statutory body that oversees securities market in India. As mutual fund houses operates under well-regulated structure, it focuses on protecting the interest of investors.To sum up, it now makes sense to know why start investing in mutual funds. Armed with a variety of options like growth funds, income funds, sector funds and ELSS funds etc., there is a fund for every need and investment objective. You investment decision will have a significant impact on the growth of your hard earned money. Invest smartly!What’s next?Now that we know how to start investing in mutual funds online in India and the reasons, it’s important to be aware of certain misconceptions that shroud mutual funds. That’s because clarity can help you take rational decisions. Speak to a financial expert to know where to start investing in mutual funds that aligns with your goals and risk appetite. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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