It is common knowledge that the stock market in India is full of uncertainties. Given the volatile nature of the markets, most investors prefer to invest their money into fixed income instruments like bank accounts, government bonds, and fixed deposits. But not everyone has such a stable financial position. If you’re someone who has a lot of capital to invest but not enough time to research and analyze investment schemes in detail, investing through mutual funds may be your best bet. These are collective investment schemes where multiple financial institutions pool money from numerous individuals and offer securities as investments to them. In this article, we will look at different types of mutual funds in India and which one is right for you if you want to invest your money prudently rather than squander it on high-risk schemes with slim chances of turning profitable over the long term.
What is a Mutual Fund?
A mutual fund is an investment scheme that pools money from numerous investors and uses it to buy shares in companies. The investors do not own the equity in the company, but they are given the right to participate in dividends through the shares they own. These schemes come in various flavours, and they are categorized based on the types of securities they offer.
Equity Hybrid Fund
An equity hybrid fund is a blend of equity and debt investments. These funds invest in Indian equity and debt instruments like government bonds and corporate bonds. An equity hybrid fund is considered a good option for investors who want to diversify their portfolios and have some level of risk tolerance. On the one hand, it invests in equities like stocks, equity-linked savings schemes, equity-linked hybrid schemes, etc. On the other hand, it also invests in debt assets like government securities and corporate bonds. These funds provide diversification benefits, but they also come with a lower risk of investment loss as debt investments have lower volatility than stocks.
A debt fund invests a large portion of its money in government and corporate bonds. This type of fund is recommended for investors who are looking to save money that they are not using. Debt funds are considered the safest investment option available in the market as they invest a large portion of their money in government and corporate bonds that are secured by a reliable source of repayment like the government. These funds provide regular interest payments and a good source of steady income for investors.
Exchange-Traded Fund (ETF)
An ETF is an amalgamation of a collective fund and an exchange-traded product. ETFs are traded on stock exchanges like the bourses where shares of the fund companies are listed. ETFs are a product of the consolidation of mutual fund schemes and stock brokerage products. These are a blend of equity and debt investments, with a large proportion of the money managed by professional fund managers through computer algorithms. They also come with the convenience of being traded like stocks on stock exchanges, making them easier to trade and transfer across borders.
Other Types of Mutual Funds
Apart from the types mentioned above, there are also other types of mutual funds that you should be aware of. These include best sip plans for 1-year hedge funds, money market funds, and commodity funds. – Hedge Funds: These are typically private equity funds that are meant for institutional investors only. They are highly volatile, and it’s very difficult to predict the movement of the market when they’re used by institutions. That being said, these are popular among high-net-worth individuals and institutions as they generate impressive returns over a short span of time.
– Money Market Funds: These are relatively safer investment options that focus on investing in government securities and cash. They are typically liquid funds that are traded frequently on stock exchanges as investors are looking to exit their positions and get a guaranteed return on their money.
– Commodity Funds: These are extremely volatile investment instruments that hold futures contracts on commodities like oil, gold, and silver. They are often touted to be a great asset for diversifying extremely risk-averse investors’ portfolios as they’re highly volatile but provide a potentially lucrative return over a short period of time.
Mutual funds are a great way for investors to build a substantial portfolio of investments. These are collective investment schemes where investors pool money from numerous individuals and invest in a range of securities that are traded on stock exchanges. One can choose from a variety of different types of funds based on the investment options they want, their risk levels, and their investment horizon. It’s important to keep the above things in mind while choosing a mutual fund.