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Understanding Different Types of Mutual Funds

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Created on
May 11, 2023

Summary

What’s Inside

Mutual funds have emerged as perfect investment options for individuals looking to avoid the hassle of the stock market or diminished returns of fixed deposits. Different types of mutual funds park your funds in several assets, allowing you to take advantage of the appreciating values.

While mutual funds do not require extensive preparation, it is necessary to understand the types of mutual funds in India. Read on as we take you through the kinds of mutual funds and help you decide the best one for your needs.

The Broad Classification of Mutual Funds

Mutual funds aim to cater to multiple investment aspirations by offering different avenues. Here are the four types of mutual funds offered in India:

Equity Funds

Mutual fund schemes that pool the majority of investor money in shares of different companies are termed equity funds.

Equity funds are beginner-friendly since they allow you to invest a small amount. Most fund houses diversify their investments to minimise your risk and make it easier to build long-term wealth.

Debt Funds

If you possess a low-risk appetite, debt funds are one of the perfect types of mutual funds for you. These schemes invest most of the investor's money into fixed-income instruments like corporate or government bonds and fixed maturity plans. Each avenue provides a fixed rate of interest with a maturity period.

Hybrid Funds

Why not leverage the benefits of both equity and debt funds? When you invest in hybrid funds, rest assured your portfolio will consist of bonds and equities to maximise wealth-building opportunities.

Most fund houses have a fixed ratio of the amount invested in each avenue, which can help you decide the ideal scheme for your needs. The only pre-requisite is significant risk appetite since hybrid funds drive away from the concept of fixed interests available via debt funds and vary according to the market.

Money Market Instruments

The money market is where financial assets with high liquidity are traded. It carries a lower risk than the stock market since the underlying assets can be exchanged for cash immediately. Money market instruments are schemes that utilise the liquidity of this market to invest and provide regular dividends for the investors.

Summing Up

The world of mutual funds offers several opportunities to grow your wealth. Start your journey with commission-free mutual funds at Fi. Plus, an intuitive user interface catering to seasoned & novice investors and the option to invest in over 800 mutual funds are lucrative features that you should take advantage of. As a money management platform, Fi offers several investment options. Fi also offers a Peer-to-Peer investment feature called Jump that helps beat inflation! Jump helps you earn up to 9% p.a on your investment. But if you want to save up for a short-term goal & earn interest on it, select our super-flexible Smart Deposit. If you're looking for higher/stable returns, opt for a Fixed Deposit.

Frequently Asked Questions

What are the different types of mutual funds, and how do they differ?

The main types of mutual funds are – equity, debt, hybrid and money market. The main difference is the underlying asset that they invest in, which dictates their value.

How can investors decide which type of mutual fund to invest in based on their investment goals and risk tolerance?

Every mutual fund scheme offers insights into the investment objective, average returns or return potential, and the associated risk. You can study these elements before committing to address your investment goals.

What are the benefits and risks associated with each type of mutual fund, and how can investors manage these risks?

Most mutual funds vary in value according to market movements and may not provide steady returns. You can manage this risk by diversifying your investments across schemes with different underlying assets.

How can investors evaluate the performance of different types of mutual funds, and what metrics should they use?

Here are some factors that you can use to compare and analyse mutual funds:

  • Risk-adjusted returns
  • Expertise and experience of the fund manager
  • Comparison of the scheme to similar schemes in the market
  • Performance history of the fund
  • Quality and nature of assets included

Disclaimer

Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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