To have a secure future and meet your life goals on time, you must save and invest money. There are many options that you can choose from when it comes to investing your money. You must target an investment option offering higher returns than the inflation rate. This will ensure that you will be able to meet your future needs.
Mutual fund schemes are one of the best options for making your money grow at a pace that is faster than the inflation rate. A mutual fund is an investment option wherein a fund manager manages a pool of money from various investors. The fund manager will make every investment decision based on in-depth research.
There are many types of mutual funds that you can invest in, but you must pick the funds that align with your life goals. Read on to learn more about the types of mutual fund schemes in India.
Types of Mutual Fund Schemes
There are many ways to classify the types of mutual fund schemes in India, but you can get confused about which one to pick. You can classify them into two mutual fund groups to get to know them better.
Based on Asset Class
- Debt Funds: These funds invest money in less risky debt instruments. They offer fixed returns and are safe for new investors. Debt funds invest in secure options like bonds, debentures, and various assets that offer a fixed return. These funds do not have the Tax Deducted at Source (TDS) option, so you must pay the tax yourself.
- Equity Funds: These mutual funds schemes invest money in the equity market, i.e., stocks and shares of companies. They offer higher returns but also carry very high risks related to changes in the equity market. Some specialty funds also form a part of equity funds, like banking funds. The income you make from these funds is liable for income tax. They are among the most popular types of mutual funds for investors who want high returns.
- Hybrid Funds: These funds are also known as “balanced funds,” as they manage a balance of asset classes and carry a lesser risk. Most of these funds invest in a mix of equity and debt assets. The ratio between these two can vary based on specific funds. As such, the returns from hybrid funds are lower than equity funds but higher than debt funds.
- Money Market Funds: These mutual fund schemes invest in liquid assets such as T-Bills. If you have surplus money to invest but do not want to take on more risk, then this can be a good option. These funds are also known as “cash market funds” and have interest and credit risks. The returns from these funds are neither too low nor too high.
Based on Specialty
- Index Funds: These funds invest in assets that reflect a given index on an exchange. Hence, these funds copy the returns of the index. Hence, the risk in these funds is not as high as when you invest in equity funds but is higher than that of fixed-income assets.
- Sector Funds: These mutual fund schemes invest in a given market sector, and the returns are directly linked to how that sector works. Hence, the risk you will face will also be linked to how the sector is doing, e.g., banking funds, auto funds, etc.
- Fund of Funds: It is one of the types of mutual funds that invests money in other mutual funds. Hence, the returns from these funds are linked to how the other funds work. They are also known as “multi-manager funds.” The risk here is very low, making this a safe option if you do not want to take huge risks.
- Global Funds: These funds invest money in assets in various countries, including your home country. The present risk is linked to the type of assets the fund manager invests in.
- Market-neutral funds: These mutual funds do not invest directly in the markets. They try for steady growth and fixed returns by investing in Exchange-Traded Funds (ETFs) and treasury bills. Hence, the risk present in the investment is much lower than in other options.
Selecting the Best Mutual Funds in India
If you want to invest in a mutual fund that will grow your money, you need to know how to select the best fund schemes. Equity funds can offer very high returns but are also very risky. On the other hand, debt funds have less risk but also offer low returns.
Hence, it is not ideal to list the schemes you can invest in, as they might not meet your long-term goals. Here are some tips to help you select from various types of mutual funds:
- Your Goals: You will have to look for a mutual fund to help meet your life goals. This will help you find the right balance between risk and return. This fund must help you get to your life goals on time.
- Risk Appetite: The amount of risk you are willing to take will directly affect the returns you can get from mutual funds. In other words, if you are young, go for equity funds to benefit from long-term growth, but if you are about to retire, you can opt for debt funds as they have a lesser risk.
- Fund History: Look at the last 5- and 10-year histories of the mutual fund. This will help you learn if the returns from the fund will help you reach your goals.
Mutual funds offer you a great option to invest your money and make some returns on your investment. If you are new to mutual funds schemes and do not know which ones are the best for you, you need to get more information on the various funds before you decide.
You must visit Piramal Finance to learn more about the world of mutual funds and be ready to decide which fund to invest in. They have many articles and blogs there to help you in the process.