Let’s understand what mutual funds So let’s take an example: if you want to go from point a to point b, you have two options. One is that you can drive yourself; you can decide which way to go and you can explore the routes. The second option is that you can hire a driver. He will decide which road to choose and at what speed he has to drive which car to take all these decisions. He will only take you to your final destination. So that is the difference between stock market investment and mutual fund investment. In stock market investment, you do the research. You analyse the stock, how it is going to perform in the future, and after seeing all these things, you choose the stock. But on the other hand, if you don’t have time to analyse stocks but you want to invest your money, you can choose mutual funds. In mutual funds, there are professionals who have deep knowledge of the stock market, and they take the money from people like you. They don’t have time to research stocks but still want to invest money, so they take the money and invest it in different places like equity, debt, and stocks. And they gain some profit out of that, like they can earn in the form of interest, dividends, or profit. It can be in the form of profit also. For example, if you have invested 100$ and it became 200$ then what do you think they will give you all that money? No, they will take some small amount of that money and that is their profit.
Types of mutual funds.
So let’s talk about the different types of mutual funds. You’ve probably heard of many different types of mutual funds in the market, and many people are confused about which type of mutual fund they should invest in. Let’s clear that up. There are many different types of mutual funds, and they all fall into five categories.
1.) Equity mutual funds.
2.) Debt mutual funds.
3.) Hybrid mutual funds.
4.) Solution-oriented mutual funds.
5.) Index funds.
1.) Equity mutual funds.
Equity mutual funds are those funds that invest your money directly in the stocks or shares of a company. They take your money and, after researching, examining, and considering all factors, they select the best stock and invest it there. You can choose any sector to invest your money in, like the tech sector, the thermal power sector, the infrastructure sector, or anything else, but they will only invest after doing good research. There is some risk associated with equity funds because their performance is based on the market, so it involves some risk.
2.) Debt mutual funds.
Debt mutual funds are unlike equity funds because in this type of investment, your money is not invested in stocks or shares. Your money is invested in other places like government securities, corporate bonds, commercial paper, and many others. Returns in debt mutual funds do not fluctuate like in equity funds because they do not depend upon the market. As compared to the equity fund, the return on debt funds is lower. Therefore, debt funds are a low-risk investment option. Debt mutual funds are a good option for people who want low risk and who want to invest their money for a short period of time (3–12 months). It is better to keep your money in debt funds rather than keep it in a savings account.
3.) Hybrid mutual fund.
As you have guessed from the name itself, it is a hybrid, which means a mix of both equity and debt mutual funds. Some investors don’t want to take high risk, so they don’t invest in equity funds; some investors don’t want less return, so they don’t invest in debt funds, so hybrid funds have come into the market for these types of customers. They are less risky than equity funds and provide a higher return than debt funds. The fund manager in this type of fund invests the money of the investor in both types of funds; they invest some money in equity funds and some money in debt funds, which results in a balanced portfolio. These funds are preferred by those who want less risk but a higher return.
4.) Solution oriented mutual funds
This type of investment is made for a specific purpose, such as your child’s marriage, buying a house, buying a car, or for retirement purposes, based on the investor’s plan, and the fund manager decides where to invest the money and for how long. This type of investment involves less risk because it is solution-oriented. If it contains high risk, then how will it be solution-oriented? But you cannot expect a very high return from these types of funds. They have to play safer. That’s why there is less risk.
5.) Index funds
An index fund manager does much effort in investing your money. They just simply copy the stocks that are listed in the index, such as NSE & BSE, and invest in those stocks because these are the top stocks in their sector which give high returns. There is not much risk in the index fund because they are the best stocks and they continue to grow with time until and unless there is any crisis or pandemic.
The pros of mutual fund investing.
There are a number of reasons why mutual fund investing is good. Let’s discuss the points.
1.) Managed by professionals
If you don’t have time but still want to invest your money, mutual funds are the way to go.The professional will choose the best stock for you and invest your money here.
2.) Diversification.
If you are looking to diversify your money, then you can consider mutual funds. By using mutual funds, you can invest in several stocks. You can also invest in hybrids, which means in both stocks and debt. Mutual funds are a great option to diversify your money.
What is SIP?
A systematic investment plan (SIP) is a facility offered by almost all mutual funds where investors can make a habit of investing. SIP allows investors to invest money in a periodic manner every month, week, or year of any fixed amount decided by the investor. When an investor chooses the SIP option, then money from his bank will automatically be withdrawn and credited to the mutual fund. And that amount will be decided by the investor. Every mutual fund has their own minimum limit for SIP.