Mutual funds are an effective investment tool. It helps your money work for you based on how well the market performs. This is the reason they are so popular. But it comes with one unique challenge. A new investor faces an overabundance of options when deciding to choose the right fund. Even for someone who knows what is a mutual fund and how it operates, it can be tricky finding the right choice.
In this article, we look at different types of mutual funds based on their investment objectives.
Also Read: Types of Mutual Funds Based on Market-Cap
A balanced fund invests in both equity funds and debt funds. However, growth funds invest primarily in equity stocks of a company or growth sectors. The main purpose of these funds is to generate capital appreciation. They are considered ideal for investors with a long-term investment horizon as they hold more risk. If you are looking for higher returns on your investment and have a good risk appetite, growth funds can be a best investment option.
These funds can provide you with a regular income. It invests in bonds, debentures, stock with high dividend potential and government securities. While it is true that no mutual fund scheme can guarantee good results, income funds can offer the best feasible option of generating regular income as they are actively managed. If you are looking to park surplus funds for short to medium term and have a low-risk tolerance, these can be an ideal choice.
Liquid funds belong to the debt fund category. They invest in money market and debt instruments with a tenure up to 91 days. You can invest a maximum of Rs. 10 lakhs in liquid funds. A distinguishing factor between liquid funds and other debt funds is in the calculation of NAV of mutual funds. While the NAV of liquid funds are calculated for 365 days (including Sundays), for others, only business days are calculated.
Aggressive Growth Funds
Aggressive growth funds carry a slightly higher risk as they are designed to make steep monetary gains. You can choose a fund based on the beta, a tool to gauge the fund’s movement compared to the market. For example, if the market shows a beta of 1, the aggressive growth fund reflects a higher beta, say, 1.10 or above.
Capital Protection Funds
The main aim of capital protection funds is to protect your principal and earning smaller returns. Capital protection funds invest a portion of your money in a certificate of deposits or bonds and the rest in equities. These funds are closed-ended. This means they are locked during their term, which could be 1 year, 3 year or 5 years.
Fixed Maturity Funds
Fixed maturity funds invest in debt instruments primarily that has a predetermined maturity date. The maturity of the fund coincides with the maturity of the debt investments made. These funds adopt a buy and hold strategy..
These funds invest with a long-term goal in mind. Pension funds can secure your family’s future when you no longer earn a regular income. These funds invest between equity and debt markets. In this way, the high-risk portion section of the investment can provide returns, while debt markets can help balance the risk.
Consider a mutual fund investment to grow your wealth. But it can help to understand your areas of investment, by reading and researching on them.