Lately there has been a lot of buzz around Mutual Funds. There has been a lot of public interest regarding investing in Mutual Funds. Mutual Funds is a very vast topic and a little knowledge can help us in the long run. In this post, I will touch upon some basic information that one needs before deciding to invest in Mutual Funds.
Definition of Mutual Funds
A Mutual Fund in simple words is a financial vehicle which collects money from many investors and invest on their behalf in stocks, bonds, money market instruments, gold etc. Why Mutual Funds ? This is a fundamental question that one needs to understand and appreciate.
If you have the adequate knowledge, time and money, you can invest directly and pick promising company stocks. However, it carries a relatively higher risk. Also, you need to spend a lot of time and enerygy isnsearching from among thousands of listed stocks and identify promising ones. Post investment, you also need to continue to keep track of the stock performance and take periodical decisions.
In case of Mutual Funds, all the above work is carried out by professionals. In simple words, Mutual Funds is an indirect way of investing in companies and create wealth. There are other advantages like fexibility in investment and withdrawal and diversification.
Unless you are investing directly, you need not have extensive knowledge on stock, bond and money market to take advantage of investing in them. You only need to be armed with basic details on the different types of Mutual Funds available and the risks associated with each.
Types of Mutal Funds
Depending on the underlying security, risk and return there are numerous types of funds that cater to every type of investor. However, for sake of easy understanding, we need to first understand the three broad catagories of Mutual Funds.
- Equity Funds
- Fixed Income Funds
- Hybrid Funds
Equity Funds as the name suggests, invest in shares of companies. The primary objective of Equity Funds is wealth creation. They are high risk funds with high return potential. Some types of Equity Funds are small cap, large cap, multi cap, sector funds etc. We will understand each of these in detail in our forthcoming posts.
Fixed Income Funds as the name suggests is aimed at income generation. They invest in Government Securities or Bonds, Treasury Bills, Commercial Paper, Debentures etc which are relatively less risky. Some examples in this catagory will include Liquid Funds, Gilt Funds, Corporate Debt Funds among others.
Hybrid Funds is a combination of both Equity and Fixed Income Funds. They try and balance risk and return and try to offer both growth and income.
Now a days a lot of information is available on how to invest in Mutual Funds. It is definitely an investment option for individuals looking at wealth creation or income generation. Please keep watching this space to understand further on different types of Mutual Funds available and which will suit your personal needs.
Please do read my post on savings vs investment to understand the meaning of investment and wealth creation.