A mutual fund pools the money received from different investors who have a similar investment aim. This pool is operated by professional fund managers who invest in different instruments such as stocks and bonds. An investor’s portfolio is created by a fund manager in a way that it meets the investment objectives.
What are Mutual Funds
We all hear about mutual funds regularly, but to an outsider, the world of mutual funds can seem distant. The complex mutual funds’ jargons have perplexed many. Hence, people shy away from this lucrative investment instrument and go for more traditional options like fixed deposits. However, it is not as hard as a beginner might think.
One can explore the full potential of mutual funds with the help of research and analysis. With that in mind, here is a guide on mutual funds and how to invest in them.
Handled by a fund manager, a mutual fund collects money from investors with the same investment purpose. These pools are made of different schemes such as equity and debt funds.
Unlike traditional investments, mutual funds are high-risk instruments. Their returns are driven by the market, which makes them risky. However, mutual funds can also increase an investor’s earnings exponentially.
Mutual funds’ investments are offered in different types. The balance of risk and returns defines these types.
Here are some common types of mutual funds-
- Equity Funds
Investments in these funds are made in the equity market, and stocks mostly dominate the portfolio. Market’s performance determines the returns on equity funds.
Equity mutual funds compensate for the high investment risk with huge margins of profits. However, there is no assurance of returns as their performance is driven by the market.
- Debt Funds
A debt fund portfolio is dominated by investments in fixed income securities such as government bonds, treasury bills, etc. Unlike equity funds, debt funds offer more stability.
Debt funds help in generating regular income flows. Hence, conservative investors prefer debt funds. However, these funds offer lower returns compared to equity funds.
- Hybrid Funds
A hybrid portfolio is made of investments in equity and debt instruments. Hybrid funds help an investor balance the risk to returns ratio.
- The first step to investing in mutual funds is becoming KYC compliant. If you aren’t, then you can get the registration done with a KYC Registration Agency, a Registrar, etc. You will need standard identification documents such as identity proof, passport-sized photographs, address proof, PAN card, AADHAR card, etc.
- Next, you need to assess your risk appetite. Investments that offer high returns walk hand-in-hand with high risk. Hence, you need to consider your risk tolerance. If you can deal with high investment risk, then you should create an equity-oriented portfolio. However, if you have a conventional point of view, then you need to invest in debt or balanced funds. Once you have decided how you want to shape your portfolio, you need to allocate assets.
- You should compare different mutual funds based on your investment objective and risk appetite. It will also help you determine which funds fit in your budget.
There are different ways of investing in mutual funds-
If you want investment guidance, then you can take the help of a broker. A broker will give you the knowledge of different funds and schemes. However, you will be charged for the assistance you get from a broker.
- Fund House
You can invest in a mutual fund by visiting the office or the website of the fund house. You will have to comply with the fund house’s prerequisites. You must be KYC compliant. Once you submit the documents, you will be allowed to invest in the fund.