Mutual funds are basically investment vehicles that comprise the capital of different investors who share a mutual financial goal. The money pooled together by you and other investors are managed by a fund manager who invests it in financial assets such as stocks, bonds, etc. Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), and investing in mutual funds is surely one of the best way to appreciate your wealth.
When you purchase a mutual fund, you are pooling money with other investors. The money pooled together by you and other investors are managed by a fund manager who invests it in financial assets such as stocks, bonds, etc. The mutual fund is managed on a daily basis. Below is a diagram of how mutual funds work.
Risk capacity is basically a measure of your ability to take risk. It depends on the factors such as your regular income, wealth, age etc. Risk capacity has nothing to do with your behavioral traits. It depends on the following factors-
Now the risk profile of individuals helps to determine risk appetite. Once you understand your risk profile you can go for appropriate asset allocation, which decides what portion of your investment should go to which asset class.
These are those mutual funds that are ideal for those who are willing to take higher risks with their money and are looking to build their wealth. One example of high risk funds would be inverse mutual funds. Even though the risks are high with these funds, they also offer higher returns.
The level of risk associated with medium-risk funds is neither too high, nor too low. The corpus of medium-risk funds is invested partly in debt and partly in equities. The average returns offered by these funds range from 9% to 12%.
The corpus of low-risk funds is spread across a combination of arbitrage funds, ultra-short-term funds, and liquid funds. These funds are ideal in times of unexpected national crisis or when the rupee depreciates in value.
These funds could be ultra-short-term funds or liquid funds whose maturity extends from a month to a year. Such funds are virtually risk-free and the returns they offer are generally around 6% at the best.
Types of mutual funds in India-
Again, We shall help you to understand the different types of mutual funds in simplified manner.
Equity funds invest most of the money that they gather from investors into equity shares. These are high risk schemes and investors can also make losses, since most of the money is parked into shares. These types of schemes are suitable for investors with an appetite for risk. Read more articles on Equity Funds.
Debt funds invest most of their money into debt schemes including corporate debt, debt issued by banks, gilts and government securities. These types of funds are suitable for investors who are not willing to take risks. Returns are almost assured in these types of schemes. Read more articles about Debt funds
Balanced funds invest their money in equity as well as debt. They generally tend to skew the money more into equity then debt. The objective in the end is again to earn superior returns. Of course, they might alter their investment pattern based on market conditions. Read More articles on Balanced funds.
Mutual Funds Money market mutual funds are also called Liquid funds. They invest a bulk of their money in safer short-term instruments like Certificates of Deposit, Treasury and Commercial Paper. Most of the investment is for a smaller duration.
Gilt Funds are perhaps the most secure instruments that are around. They invest bulk of their money in government securities. Since they have backing of the government they are considered the safest mutual fund units around.
Investment Objective depends on the individuals risk appetite, duration of investment and purpose of investment.
Growth funds invest a large portion of their capital into stocks of companies having above-average growth. The returns offered by these funds are relatively high, but the risk involved along with is also quite high.
The corpus of income funds is invested in a combination of high dividend generating stocks and government securities. These funds focus to offer regular income and impressive returns to investors investing for more than two years.
Similar to income funds, liquid funds also make investments in money market and debt securities. However, the tenure of these funds usually extends to 91 days and a maximum amount of Rs.10 lakh can be invested in them.
Equity-Linked Saving Schemes (ELSS) mainly invest in equity and equity-related instruments and offer dual benefits of tax-saving and wealth generation. These funds, usually, come with a three-year lock-in period.
Aggressive Growth funds carry a relatively high level of risk and are designed to generate steep monetary returns. Although these funds are prone to market volatility, they have the potential to deliver impressive returns.
Capital protection funds which chiefly invest in debt securities and partly in equities aim to protect investors’ capital. The delivered returns are relatively low and the investors should remain invested for at least 3 years.
Pension funds are great investment options for individuals who wish to save for retirement. These funds offer regular income and are ideal for meeting contingency expenses such as a child’s wedding or medical emergencies.
Fixed maturity funds make investments in money markets, securities, bonds, etc. and are closed-ended plans that come with fixed maturity periods. The tenure of these funds could extend from a month to 5 years.