A mutual fund is an investment vehicle wherein asset management companies raise money from various investors and invest that capital in securities and other similar assets. Each mutual fund is different and differs in the type of investment depending on the goals of the investors. Each unit of a mutual fund represents a portion of the investments made by the fund in the same proportion as the portfolio.
Mutual fund investments are categorised based on the risk investors are willing to take, investable amount, term, and so on. Some popular types of schemes based on the criteria for categorisation are:
i. Maturity Period – Open-ended; Closed-ended; Interval
ii. Principal Investment – Equity; Debt; Hybrid; Solution; Other
Why mutual funds?
If you are looking to diversify your portfolio so that you can mitigate risks, investing in mutual funds gives you instant diversification. A mutual fund scheme invests in a range of financial instruments. You also get to choose how much of your portfolio you want to allocate to equity, debt or hybrid.
Even though subject to market risks, certain mutual funds are relatively less riskier than investments in direct equity due to the diverse investments that are a part of a portfolio. The ticket price of mutual fund units is generally low, and investors can choose among various schemes that are professionally managed. There are select funds that also offer tax benefits.
How to choose the right mutual fund?
It is important to choose mutual funds that align with your investment goals based on the duration of investment, expected returns, risk profile, type of portfolio, required liquidity, and so on. Investors willing to take more risks could invest in small and mid-cap funds, while investors willing to take fewer risks could invest in large-cap and diversified funds, or even opt for debt funds.
When and how to invest in mutual funds?
There is no right or wrong time to invest in mutual funds. Many experts suggest that the sooner you start investing, the better it is to grow your wealth.
Mutual funds provide great flexibility on the initial investment. You can choose to invest a lump sum amount or enroll in a Systematic Investment Plan (SIP). Under SIP, you deposit a specified sum at a predetermined interval.
Things to keep in mind while investing in mutual funds
Even though professionally managed and diversified to lower the risk, mutual funds are still subject to market fluctuations. You shouldn’t invest in mutual funds and not keep track of the progress you fund is making. Many times, an industry-based mutual fund may perform poorly if a factor affects the entire industry.
How to build a portfolio?
i. Understand what kind of an investor you are – your goals, risk tolerance, investment ability, and so on
ii. Choose the right fund category that is in line with the above
iii. Pick a mutual fund based on risk-adjusted return, performance, expense ratio, and other factors
iv. Monitor the fund closely and rebalance the fund regularly to maintain the objectives of the investment
Mutual funds could be a great investment avenue for you if you are looking to meet some short- or long-term goals or just want to grow your wealth. Factoring in the above aspects is essential to ensure that you make the right investment choices.
Involving an expert in the decision-making process could also help you to reach your financial goals. A financial advisor who curates plans unique to your investor profile can efficiently guide you in your investment journey.
Reach out to one today!