There are several different kinds of mutual funds in the market. As a result, a new investor can get confused about the right choice. Nonetheless, it is important to note that you are certain to find a mutual fund based on your needs and objectives as an investor. Therefore, an introduction to the different kinds of mutual funds is essential.
Before you do so, you need to understand that mutual funds tend to vary with respect to their reward and risk profiles. Typically, mutual funds that offer higher potential returns are also the ones with higher risk. Keep in mind that all mutual funds carry a certain level of risk. It is impossible to find a mutual fund that offers zero risk. With that in mind, here are some of the common kinds of mutual fund investment that you should be aware of.
These funds invest the money in the equity shares or stocks of companies. Although they are high-risk funds, the returns provided are suitably high as well. Under equity funds, it is possible to find specialty funds. These funds invest in the equity of specific industries such as banking and infrastructure.
Debt funds are those that make their investments in debt instruments. Some examples of debt instruments include government bonds and company debentures. They provide fixed returns. As investments, they are quite safe. More importantly, these funds will not be deducting tax at source. As a result, you may need to pay tax yourself if the income from the investment is taxable.
Money Market Funds
If you choose this type of funds, your money will be invested in liquid instruments. Some examples include CPs and T-Bills. If you want to invest your excess funds, they are a good choice. The returns are immediate but are moderate. As for risk, they are considered to be quite safe.
Hybrid or Balanced Funds
Hybrid funds make their investments in a diverse range of asset classes. The proportion of debt and equity investments can vary. As a result, this brings about a balance between returns and the risks.
These mutual funds invest their money mainly in equity stocks. The aim is to provide capital appreciation. While the risks are higher, they are more suitable for investors who want to invest in a long-term fund. At the same time, their higher risk means that the returns can also be high.
These funds make their investments mainly in fixed-income instruments. This includes debentures and bonds. The aim of these funds is to protect the capital while ensuring that the investors get regular income.
Here, the investments are mainly made in equity shares. However, the best feature of these funds is that the investments are qualified for deductions as per the Income Tax Act. These funds carry a high risk but that means you may also get high returns.
The above are just a few of the mutual funds available in the market. If you are interested in making a mutual fund investment, make sure that you understand all the terms and conditions first.