Mutual fund schemes are one of the best investment avenues which can help you achieve your financial goals. You can invest your money in mutual funds through the systematic investment plan (SIP) mode, which is a systematic and hassle-free way of investing money in mutual funds.
The categories of mutual funds are primarily defined as per the risk taking capacity of an investor, the time horizon for which they need to keep their money invested and the tax benefit. All the funds have their own importance. Therefore, one should not compare the returns from different categories. One should also know that the returns are market linked and are not guaranteed at all. Returns may also vary from person to person having the same fund. This happens because of the market volatility and the time of starting your investment.
However, it is necessary to take the help of a financial adviser before investing in any category of fund. Here are nine different types of funds to choose from:
Large Cap Funds
Lap cap funds are the funds which comprise of blue-chip companies with large market capitalization. However, the criteria of being a large cap varies from company to company considering their huge market capitalization. There are several mutual fund schemes available in the market which can be bought by investors. These funds offer stability and sustainability, giving slightly lesser returns as compared to diversified funds and small /mid cap funds under normal circumstances. These funds also help in generating a good corpus, when investment is done for a longer term.
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A balanced fund combines debt and equity stocks equally, which generally comprises of bond components or a money market component. These funds are also known as hybrid funds which have relatively fixed mix of stocks and bonds mainly in 50:50, 65:35 or 80:20 ratio, among others. These funds are beneficial for those who are always unsure about investing money in risky or less-risky funds. They also offer good returns compared to other liquid funds.
Mid/Small Cap Funds
These funds are very risky in nature but provide exceptionally high returns over a period of time because under this fund category fund managers invest money in small and emerging companies’ funds which provide very good returns. Generally, these companies have low market capitalization. Someone who is very aggressive in taking risks can invest in such funds. These funds offer the highest returns under normal conditions as compared to other categories of funds.
It is an investment fund that contains a wide variety of securities so as to reduce the amount of risk in the fund. This mainly spreads the risk into various sectors which help risk-averse investors to take exposure to a mutual fund. Actively maintaining diversification helps in preventing the events that affect one sector and reduces heavy losses if market conditions tend to go wrong. These are good funds to invest your money. They also provide better returns than liquid funds.
This kind of fund is not dependent upon the market capitalization of a company, which makes the fund manager make the best use of opportunities which they are getting from the market volatility. The scope of diversifying the investment widens when investing in flexi cap funds.
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If you want to invest your money in certain sectors, you can choose such kind of funds. These funds are designed by inculcating different sectors which are closely related to each other. For example, IT and telecom sector, banking sector and so on. Sometimes, certain sectors grow immensely. Therefore, taking the advantage of the same one should invest in such funds.
Asset Allocation Funds
These funds are the mix of three asset classes – equity, debt and cash equivalents – dealing in a wide variety of securities. These are formed having a certain mix of asset classes unlike balanced funds where the ratio is defined approximately in the 60:40 ratio of equity and debt class, respectively. This fund in itself gives a diversification to your invested amount.
These funds invest in pure debt instruments and money market instruments, and generally provide a return of 7% to 9%, depending on the asset mix. The investment options available under such funds are MIP’s, FMP’s, liquid funds, etc. People who generally do not want to take risk of the high market volatility can invest in such funds. However, the volatility factor cannot be neglected completely.
Liquid funds are a type of mutual funds where the investment is made in securities having a maturity of up to 91 days. Under such category, assets invested are not held for a long time. They can be easily redeemed any time as they do not have a lock in period. Your fund may generate approximately 7% to 8% of return annually or even more as per market conditions.
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Investing in mutual funds is subject to market risks. Therefore, to reduce the volatility factor one should remain invested for a long time. The longer you remain invested, the more corpus you can generate due to the compounding effect.