In this blog, I will try to make the financial term “Mutual Funds” snackable and novice-friendly, which most often, folks found complicated.
Sadly in India, the subject of money is taught at home, not in school. Apparently, schools only teach us to get a job. They should be teaching kids how to make, manage and invest money.
“A person can be highly educated, professionally successful and financially illiterate”.Robert T.kiyosaki, in the book, Rich Dad Poor Dad.
What Are Mutual Funds?
“Mutual Fund” is a special kind of investment through which you can invest in different types together. you can do diversified investing in one place.
Traditionally speaking there are mainly four places where you can invest your money. i.e Savings Account. Fixed Deposits, Gold, & Real Estate. Some people want to take more risks and invest money in the Stock Market which is another way to invest money.
An Asset Management Company (AMC) collects money from the people and that company invests all the money collectively at different places.
They invest money at different places and the return rate they get collected from these different places out of which some small percentage is kept as a profit by the “Asset Management Company” and the rest you get back as your return on investment.
Key Factors Of Investments:
Return: Return means the “percentage of profit” you are getting after your investment is done. One thing you need to keep in mind is the “Inflation rate”.
If the inflation rate in India is 5% then, you should see that your profit return is more than at least 5%. Otherwise, you would see that you made more money but its value remains where it is right now. It beats the whole point of investment.
Time: Every investment needs time and patience. you cannot expect today you start investing and tomorrow you will become “Rakes jhunjhunwala”.
Risk: Risk is also involved in any investment you do, if the risk is high then the return will also be high.
Diversification: It means that you can invest at different places or it is the mixing of investment and assets within a portfolio to reduce risk, That is one of the advantages of investing in a mutual fund.
In most cases, mutual funds are typically considered low risks. A lot would depend on the portfolio that you would choose to invest. Regardless of everything, always do your research and read the policy documents carefully.
What Are The Types Of Mutual Funds?
1. Equity mutual funds
An equity fund is a mutual fund that invests principally in stocks and equity funds are also known as stock funds.
Types of Equity Mutual Fund
a. Diversified Mutual Fund
The investment is done in the large, medium, and small-capital Companies or it’s done in different companies.
b. Equity Linked Saving Scheme (ELSS)
Equity Linked saving Scheme is a special type of equity fund where you can save your tax. you can save the tax on its profit.
2. Debt Mutual Fund
A debt mutual fund is a mutual fund scheme that invests in fixed income instruments such as corporate, Government Bonds, corporate securities and money market instruments, etc. that offer capital appreciation.
The price Fluctuation is much lower than equity shares. Hence, if you are investigating for a short-term period then, debt mutual funds are apt for you.
3. Hybrid Mutual Fund (Debt + Equity)
A hybrid mutual fund is a type of mutual fund that invests in more than one asset class. Most often, they are a combination of equity and Debt assets. portfolio risk can reduce by combining assets that have a low correlation.
Pros & Cons of Mutual Funds
-Professionals manage your money.
– Difficulty in comparing funds.
– Lack of transparency in holdings.
To summarize, mutual funds are considerably a safe investment. However, that doesn’t mean that it doesn’t come with any risk. This is typical suitable option for beginners or someone that doesn’t have a bigger appetite for risk. In addition, it is also not worth it to invest everything in high risk markets or scheme.
Mutual Funds investment can give you a much safer and secure options to invest.