For a first-time investor, making the right beginning is of extreme importance. Therefore, it is essential for every beginner to understand the basics of mutual funds before investing.
Read this article to know more about mutual funds.
Beginners can find the process of investing in mutual funds difficult. However, new investors in mutual funds can make the right investing decisions by understanding the basics.
If you are keen on investing in mutual funds, then there are a few essential things you need to know before you start investing.
What are Mutual Funds?
A mutual fund is a professionally managed investment fund where money from multiple investors is pooled together. The accumulated corpus is used to purchase stocks, bonds, or company shares.Securities and Exchange Board of India (SEBI) makes the rules and regulations of mutual funds.
Mutual funds are available in various types. Therefore, every investor can invest in a mutual fund scheme that suits his/her risk appetite and investment objective.
Furthermore, it is the responsibility of fund managers to monitor mutual funds. The managers conduct extensive market research before investing. Thus, an investor doesn’t have to put in a lot of efforts in order to invest in mutual funds.
Types of Mutual Funds
- Equity Funds
Equity funds primarily invest in shares of various companies. It is a fund that has a minimum exposure of 65% to equities. Equity funds are a great option for investors looking for long term capital appreciation.
Furthermore, equity funds are available in various types such as- Small-Cap Funds, Multi-Cap Funds, Mid-Cap Funds, Diversified Equity Funds, etc.
- Debt Funds
Debt funds are funds that invest in fixed income securities such as bonds and treasury bills. Investors who don’t have a high-risk appetite should consider debt funds. Equity funds are riskier than debt funds. Therefore, debt funds offer lower returns compared to equity funds.
Some of the types of debts funds are- Ultra Short Term Fund, Floating Rate Funds, Gilt Funds, Corporate Bond Funds, Dynamic Bond Funds, etc.
- Balanced Funds
Balanced funds invest in equity shares as well as debt securities. These funds are also known as hybrid funds. Balanced funds are an ideal option for first-time investors as these funds invest in stocks while lowering the risk by investing in debt securities.
Balanced funds are available in a few types- Multi Asset Allocation Fund, Debt Hybrid Funds, Equity Hybrid Funds, Dynamic Allocation Hybrid Funds, etc.
Things to Keep in Mind Before Investing in Mutual Funds
- The first thing you need to do is identify your investment objective. You should also know your risk appetite and the time horizon.
- Make sure your investment portfolio is diversified in such a way that if one fund underperforms, then the gains from another fund can help you avoid the losses.
- You can invest in mutual funds in two ways- Lumpsum Investment and Systematic Investment Plans (SIPs). A lumpsum investment allows you to invest a substantial amount of money in a mutual fund scheme. However, if you opt for the SIP mode, then you can invest a fixed amount of money at regular intervals.