In today’s Scenario, fixed deposits are not giving good returns on the investment. They are not even beating the inflation rate. Mutual Funds are one of the best instrument to earn a good return on investment by taking the lower risk. Mutual funds have many benefits such as diversification, professional management, liquidity, tax efficiency, etc
So what are the Mutual Funds?
Mutual Fund is an Investment Management Company. Mutual Fund companies collect money from many investors and invest the amount with the proper market study to earn maximum profits. The money is handled by professionals called as Fund Managers. For this service, the Mutual Fund companies charge a small amount from the investment as a fee.
When you invest in the stock market you get the share of a particular company, similarly, when you invest in Mutual funds you get the units of that fund.
What are the types of Mutual Funds?
Mutual funds are actually of many kinds and the variety of mutual funds is the primary reason for getting confused about where to invest. The categories of mutual funds depend upon the maturity of the fund and where the Fund Manager invests the money.
Categories by Maturity Period:
Open Ended: Open-ended funds don’t have the lock-in period. You can invest and withdraw money from this type of funds whenever you want. Such funds are good for enjoying liquidity. But some funds charge the small amount to the investor if he withdraws money within a specific period. So please read the scheme related documents before investing.
Closed Ended: A closed-ended fund has a fixed maturity period i.e they have a lock-in period like fixed deposits. You can invest in this time of funds at the launching time and withdraw after maturity. Generally, the maturity of closed-ended is within 3-6 years.
Interval Funds: Interval Funds are the combination of Closed-ended fund an Open-ended fund. They are open for investment and withdrawal for specific intervals.
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Categories by Asset Class:
Debt Funds: Debt funds are the funds in which the money of an investor is invested in the Government Bonds, Treasury Bills, Corporate Bonds, Money market Instruments etc. They offer a safer avenue for investors who want to earn returns higher than that offered on conventional bank deposits but are not ready to take high risks by investing in shares or equity.
Equity Funds: Equity mutual funds are the funds that invest principally in share market. Equity Funds give the higher return than that of debt funds. But the risk in the Equity funds is more than that of debt and hybrid funds. Usually, investors with a high appetite for returns and risk, invest in these funds.
Hybrid Funds: Hybrid funds are the combination of equity and debt mutual funds. Hybrid funds invest some portion in debt and some portion in equity. Because of this combination Hybrid Funds are expected to generate more returns than debt funds by taking the lower risk than equity funds. They provide a balance between security and high returns. So, investors who want to take advantage of moderate returns while minimizing the risk can opt for these funds.
In the next part, we will discuss each category of Mutual Funds in detail.
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