Investing in mutual funds is definitely the order of the day. Everyone these days seems to be investing in one or the other fund type- more often than not without really weighing the pros and cons or examining the possible risks involved. But you are not any routine investor; you are a smart investor who is ready to dig through any number of information sources to zero in on that one perfect fund type for his needs. Dished out here is something to feed your inquisitiveness- a pool of information linked to Mutual Fund Types and how you may use them to your advantage. Just read on-
The basic mutual fund types – Debt, Equity and Balanced Funds
All the three mutual fund types viz. debt, equity and balanced- serve different purposes and should be opted for only when they seem to serve your purpose well. Let’s delve deeper into each one of them and try to develop an understanding of their nature and benefits.
Debt funds are pools of investment in which major holdings are fixed income securities or bonds. So, the investment is basically on money market instruments, security products, long or short term bonds or floating rate debt.
Upsides of investing in debt funds-
- Debt funds facilitate withdrawals as and when sought. So, more flexible than fixed deposits.
- Their tax efficiency is high.
- Investment flexibility is impressive.
- Not much affected by falling interest rates.
- With fund investments on higher safety instruments, the credit risk can be minimized considerably.
Here, the fund assets are invested in shares and stocks of companies on behalf of the investors. The amount of cash is little and much of the investment is in the form of stocks. That is why, equity funds are also called ‘stock funds.’
Upsides of investing in equity funds-
- Redeem your investment any time you want.
- Systematic investment plans (SIPs) allow you to make small regular investments.
- You receive tax benefits after an investment period of one year.
- Let your money get professionally managed against a low fixed fee.
- It’s possible to avoid brokerage charges when you open your account directly with the mutual fund service provider.
If you are someone who is looking for a concoction of income, moderate capital appreciation, and security, then balanced funds would be the best bet for you. These funds make investments in asset classes in such a way that the amounts invested don’t cross a set higher or lower cap. So, basically, they are hybrid in nature.
Upsides of investing in debt funds-
- The investments are done on both debt and equity financial securities, which results in investment diversification.
- They are far less risky than pure debt or equity funds.
- The fact that their asset allocation has a debt component to it makes these funds more immune to market downturns.
- Best for retirement planning and higher education of children or their marriage.
- Ideal for risk-phobic investors.
The bottom line: Choosing the right fund is all about striking the right portfolio balance
Bear an important thing in mind- there is no ‘one size fits’ all approach to investing in mutual funds. The right choice of fund depends on a balanced approach. Deciding on which fund option to opt for may be difficult at times. And when the options at hand are so varied, coming up with a clear-cut answer becomes even more difficult. Neither you can choose a random fund type and feel secure for the rest of your life, nor can you go for the types available all at once. So, what to do? Create a balanced investment portfolio. It’s more like consuming a balanced diet for optimum health. So, the more tailored your investments are, the more profit they bring to the table.