The Buyt Desk
Mutual funds have gained tremendous popularity in the past few years. If you have been considering investing through mutual funds then that means you are getting ready to embark on your wealth creation journey. Mutual Funds have given good returns to investors compared to any other kind of investment. Before investing in a mutual fund, you must know what are asset-based mutual fund products so that you choose the one that perfectly fits your investment plan. The right product will help you achieve your investment goal.
The asset management companies offer diverse types of mutual funds and have broadly categorized them into different types based on structure, asset class, speciality, investment and risk to make it easier for investors. We will focus on the classification of asset-based mutual funds. The underlying asset of the mutual fund decides the category of the fund and the name of the fund tells you the category. Broadly there are 4 categories based on asset- equity funds, debt funds, money market funds and hybrid funds. All the four follow a specific way of investment and this differentiates one from the other. Every Investor should choose the fund according to his/her risk-taking capacity. The overall portfolio’s diversification will also be a key reason behind the choice of fund.
Let us understand all 4 categories in a detailed way-
Equity Funds – In this fund, asset management companies invest the corpus in stocks or company shares. These funds are considered high risk. However, it assures higher returns. These funds include fast-moving consumers, banking and infrastructure.
Suggestion to Investors- If you pick an equity-oriented mutual fund you should always have an investment horizon for the long term. They have generated higher returns over a longer period of time.
Money Market Funds – In this fund, the asset management company invests the corpus in liquid instruments such as commercial papers, certificates of deposit, dated securities and treasury bills. This fund is one of the best investment options for investors who look forward to having moderate returns but in a short period. This product comes with risks like reinvestment risk and interest risk. That is why this is a preferred investment for the shorter tenure of not more than 3- 12 months.
Suggestion to Investors- The Money market funds disburse regular dividends. They are known for giving returns in a short period of time so opt for a short term plan. Investors with low-risk appetites can use this type of fund for parking their surplus money for a short period.
Debt Funds – This investment product is the safest among all mutual fund products. Debt funds invest in fixed coupon-bearing instruments, such as government bonds, securities, debentures, etc. They are low-risk low return funds and are ideal for investors with low-risk appetites. They do come with credit risk.
Suggestion to Investors- Debt Funds come with a fixed interest rate and a maturity date so is a good option for passive investors looking for regular income.
Balanced or Hybrid Funds – This fund invests corpus in the mixed-asset class. Hybrid funds have exposure to both equity and debt. The proportion of equity remains higher than the debt in this fund. The standard is 60:40, however, it varies in the same proportion. Based on the ratio, the risk and return of this investment product also vary.
Suggestion to Investors- Hybrid or balanced funds are best suited for investors who are moderate risk-takers and are happy with comparatively low returns.
