You would have probably seen the ads for ” Mutual Funds Sahi hai” during cricket match breaks. In those ads, cricketers educate about Mutual Funds and motivate people to invest in Mutual Funds. But they also warn about Mutual funds’ volatility.
So how many of you know about Mutual funds? Probably very few of you. But do you know how beneficial mutual funds are if we invest in them after extensive study? Also, mutual funds can benefit in tax saving, higher returns than FD and savings accounts, and risk management.
Let’s learn about mutual funds, how they work, how much return they yield, how much risk is involved, and types of Mutual Funds.
What are Mutual Funds?
There’s always a saying that, do not invest in one kind of investment. Instead, diversify your investment to lower the risk of loss. On this saying, Mutual Funds work. Mutual Funds are a type of investment through which you indirectly invest in different kinds of investment options.
You get an option to diversify your investment even though you have invested in one place!
Currently, in India, many private, public banks and companies have their mutual funds. These include HDFC, ICICI, HSBC, Aditya Birla, Tata, Reliance Mutual funds. In addition, companies can start different mutual funds like, ICICI which has more than 1200 Mutual funds currently running.
How do Mutual Funds work?
So how mutual funds help us diversify our investment, even though we’ve invested in one place. So it starts with an Asset Management Company(AMC). AMC of any big company like TATA or HDFC starts any mutual funds. You gave your desired money in that mutual funds, and like you, many people invest money in the mutual funds.
AMC has many experts who guide AMC to invest the money of mutual funds at several places or in stocks, debentures, and companies. Now whenever and whichever return on those investments comes, AMC returns it to you back after deducting their 1-2% profit share.
Risk and Returns in Mutual Funds.
Risk and Returns depend on the mutual fund you are investing in. For example, AMC invests your money in different options like stocks, bonds, debentures. So, like equity mutual funds, the risk is higher, and the return is also higher.
On the other hand, in Debt Mutual funds, the risk is lower, and with that, the return is also lower than equity mutual funds. So to understand the risk and return in Mutual funds, we should know Mutual funds types.
Types of Mutual Funds
Mainly Mutual funds are in three categories. In addition, these three categories have their sub-divided categories. So let’s have a look!
1. Equity Mutual Fund
2. Debt Mutual Fund
3. Hybrid Mutual Fund
Equity Mutual Fund: In Equity Mutual Funds, your money is invested in the stock market and with that comes higher risk and higher return. However, it is not sure that these Mutual Funds can always give higher returns, as they are risky, they run in loss sometimes.
Here are its types:-
- Significant Cap/Mid Cap/Small Cap Equity Funds– When AMC invests the money of Mutual funds in Large companies, such as Reliance or Tata, it is called the Large Cap Equity Fund. When a Mutual fund’s money is invested in medium-scale companies, it is called Mid-Cap Equity Mutual funds. When Mutual funds money is invested in small companies, it is called Small Cap Mutual funds.
- Diversified Equity Funds– In these funds, investment is made in all three types of companies, i.e., Small, Med, Large Cap, altogether.
- Equity Linked Saving Scheme (ELSS)- These equity funds mainly help in saving tax. The return or profit on this equity fund is used to save tax up to 1.5 lakhs.
- In this kind of mutual fund, sector mutual funds are made in companies belonging to a specific sector. For example, a mutual fund mainly invested in agriculture companies.
- Index Funds– Index funds are based on Index. Like, A fund is invested by mimicking the companies listed in Index like Nifty or Sensex. The goal of an index fund is to gain high returns in the long run by mimicking Indexes.
Debt Mutual Fund :
These Mutual; funds are based on Debt instruments like Debentures, Bonds, certificates of deposits. These funds yield a low rate compared to equity funds, but the risk is also lower in these funds. Following are its types:–
- Liquid Funds – These funds are called liquid because they can be converted into cash very quickly. These funds take 1-2 days to get converted to currency. These are also called alternatives to the Savings account.
- Gilt Funds– The investment in these funds is made in Government-issued bonds. The risk in these funds is technically zero as the government borrows money from you.
- Fixed Maturity Plan– These funds are an alternative to fixed deposits. You have to invest money in these funds for a definitive time. The risk is also lower in these funds.
Hybrid Mutual Funds:
These Mutual funds are a mix of Equity and Debt Mutual funds. These funds invest your money in both equity funds to gain higher returns. On the other hand, your money is also infused into Debt funds to lower the risk of loss. People who want to diversify their investments can invest in these funds.
Here are its type:
- Balance Savings funds – These are also called Equity Savings. The money is invested in the 70:30 ratio, with debt on the 70% side and equity on the 30% side. Due to the high ratio of debt funds, the risk is lower.
- Balanced Advantage Funds– These funds are called Hybrid Aggressive as the money invested is in the proportion of 70:30 with equity on 70% and debt on 30% side.
- The returns are higher in these funds due to a higher percentage of equity funds.
Should you Invest in Mutual funds?
When you save your money in a savings account, it yields a lower return than inflation, meaning your money losing its value over time. Likewise, when you invest money in the share market, you risk losing money in the share market
So as a safer option, you should invest in Mutual Funds. You can choose your mutual funds according to your needs like lower risk, higher returns, tax saving. Mutual funds also help save tax. Mutual funds are also effortless and affordable to invest in. You can begin investing in mutual funds from as low as 500 per month SIPs.
But Mutual funds also have disadvantages. Your investment’s future is based on an Expert’s opinion, and as a person, Experts can get wrong. This can make your investment volatile to market risks and losses.
But as investing trend in India is on the rise, you should start after studying mutual funds and invest from low amounts. So start investing now to make your life after retirement easy.
Thank you for reading!