Investing in mutual funds is a popular way to grow wealth over time, especially in India, where the mutual fund industry has seen significant growth. However, before you buy mutual funds, it’s important to understand everything about mutual funds. This includes the different types of funds available, the associated risks, and the potential returns.
If you are looking to buy mutual funds, read along. This blog will provide the essential information you need to make informed decisions.
What are mutual funds?
Mutual funds pool money from various investors to invest in a diversified portfolio of securities, such as stocks, bonds, and other assets. Managed by professional fund managers, these funds allow individual investors to access a diversified portfolio with a relatively small amount of capital.
There are several types of mutual funds, each designed to cater to different investment goals and risk appetites.
Types of mutual funds
Mutual funds come in various types, each catering to different investment goals and risk appetites. Whether you’re looking for growth, income, or stability, understanding the various types of mutual funds can help you make informed investment decisions. Before buying mutual funds, keep these in mind:
- Equity funds
These funds invest in stocks and are ideal for investors looking for high long-term returns. However, due to market volatility, they also come with higher risks.
- Debt funds
Debt funds invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments. They are generally considered safer than equity funds and are suitable for investors looking for stable returns with lower risk.
- Hybrid funds
As the name suggests, hybrid funds invest in a mix of equity and debt securities. By diversifying across different asset classes, they aim to balance risk and return.
- Solution-oriented schemes
These schemes are tailored to meet specific financial goals, such as retirement or children’s education. They often come with a lock-in period, ensuring disciplined saving over the long term.
- Other schemes
There are also sectoral funds, index funds, and international funds, each with its unique investment focus and risk profile.
Plan type: direct vs. regular mutual funds
Mutual funds in India are available in two variants: direct plans and regular plans. The choice between these two can significantly impact your returns when you buy mutual funds.
- Direct plan mutual funds
In direct plans, asset management companies (AMCs) do not charge distributor expenses, trail fees, or transaction charges. This means the expense ratio—essentially the cost of managing the fund—is lower, allowing investors to earn higher returns compared to regular plans.
- Regular mutual funds
Regular plans include a sales commission paid to intermediaries or brokers who sell these funds. While this makes investing more convenient for those who prefer assistance, it also results in a slightly lower return due to higher expense ratios.
Maturity period: open-ended vs. close-ended funds
Another important aspect to consider is the maturity period of the mutual fund before buying mutual funds.
- Open-ended mutual funds
These funds do not have a fixed maturity period. Investors can enter and exit at any time, making them flexible and convenient.
- Close-ended mutual funds
Close-ended funds have a fixed maturity period, usually ranging from three to six years. They are open for subscription only during that period and are listed on stock exchanges.
- Interval mutual funds
Interval funds combine the features of both open-ended and close-ended funds. They are open for sale or redemption at specific intervals.
Modes of investment in mutual funds
Investors can choose from different modes of investment depending on their financial goals and convenience before buying mutual funds.
- Lump sum investment
A lump sum investment is a one-time investment in a mutual fund scheme. This method is straightforward but requires careful timing to avoid market volatility.
- Systematic Investment Plan (SIP)
SIPs allow investors to invest a fixed amount at regular intervals, typically monthly. This method is ideal for those who prefer to invest gradually and avoid the risk of market timing. Mutual funds SIPs also promote financial discipline and can help average the cost of investment. Comparing different mutual funds’ SIP returns can help you choose the right plan tailored to your financial goals and risk tolerance.
What to look for before investing in a mutual fund
Before buying mutual funds, consider the following factors:
- Rating: Check the fund’s rating from reputed rating agencies to gauge its performance relative to peers.
- Expense ratio: The expense ratio affects the net returns from the fund. Lower expense ratios are preferable, especially in the case of direct plans.
- Past performance: While past performance is not an indicator of future returns, it provides insight into how the fund has navigated market cycles.
- Fund manager’s track record: The expertise and experience of the fund manager play a crucial role in the performance of the mutual fund.
- Lock-in period: Some funds, like ELSS, have a mandatory lock-in period. Ensure that this aligns with your investment horizon.
- Risk profile: Different mutual funds carry different levels of risk. You should go for a fund that matches your risk tolerance and investment goals.
Invest safely
Buying mutual funds can be a rewarding way to build wealth, provided you make informed decisions. A reliable online trading platform like Ventura can help you buy mutual funds safely.
Understanding the different types of funds, tax implications, and modes of investment can help you choose the mutual fund that aligns with your financial goals. Whether you opt for a direct plan or a regular plan, ensure that your investment strategy is planned wisely.
