Mutual Funds are subject to market risk but what are those risks and how they act as an advantage to us. By the end of the article, you will understand what Mutual Funds are, what are its types, benefits and the risk factors involved.
For any individual who wants to make a long-term investment then mutual funds are the best choice because of its steady growth and returns. Mutual Fund companies are those which pool money from investors like the general public and invest them in securities which include bonds, stocks, shares and other assets which will help the money grow.
The mutual fund investor doesn’t need to worry where the funds are being invested because the Fund Manager will invest on behalf of them and in return will charge a commission.
When the Fund Manager receives a profit from the funds then the profits are distributed among the mutual fund investors based on how much their initial investment was and from how long the investment was made by the individual.
But every Mutual Fund investor is scared about their money. They might have second thoughts about the company – what if the company shuts down and runs away with the money they invested.
That’s where SEBI comes into the picture. That is the Securities and Exchange Board of India. So basically, SEBI formulated certain policies and regulates all the Mutual Funds so that the investor is not at risk at the end of the day. Also, before collecting funds from the public a Mutual Fund must be registered with the SEBI.
What are the major types of Mutual Funds?
The mutual fund schemes can be both open ended and close-ended funds. Open end funds do not have a fixed maturity period. The investor can invest at any point of time and redeem whenever he wishes to.
Whereas in the close ended funds they hold a maturity period. The investor can only invest in the initial period known as the NFO (New Fund Offer) period and the funds get redeemed automatically when the date of maturity arrives.
1. Equity Funds: The most popular schemes which allow an investor to also participate in the stock market. Basically, they invest in the stocks and shares of the companies. These funds usually have high-moderate risk but also have the potential of high returns in the long run.
2. Debt Funds: Debt funds are those mutual funds that invest in Debt instruments like government securities, debentures, and bonds. Investors who would want very low risk but steady returns can choose these types of funds.
3. Hybrid Funds: These kinds of funds invest in both Equity Funds and Debt funds. It can be in between the ratio of 50:50 or 70:30 and others depending on the Fund Manager’s investment. In this type of funds the investor can expect moderate returns at a moderate risk.
There are also other types of funds like the sector funds, liquid funds, tax-saving funds and many more which have their own risk properties and are available for the investors based on their requirements and preferentialism.
Here are some quick facts which you need to know before investing:
The Equity Funds can be divided into subcategories which are Large-cap, Mid-cap, and Small-cap funds. So, the Large-cap funds are invested in well-established companies so the risk level involved is very low compared to others.
The Mid-cap has moderate returns. The small-cap funds are invested in small companies where there is high risk but also there can be high returns. For a fresh investor, Large-cap can be a better choice to start with.
If you are an investor looking out for short-term investments for like 1 or 2 years then considering Debt funds can be the right choice since they give quick returns in a short span of time.
Then comes the Index Funds. These do not have a Fund Manager in between. Here the commission you have to pay is also very less compared to others. These types of funds are safe and can act like the best long-term savings.
While investing in mutual funds there are two ways in which you can invest. One is the Lump Sum and the other is SIP. In Lump Sum investments you invest a huge amount at one time. It can be like Rs.1,00,000 at once and whereas SIP, which is the Systematic Investment Plan where you invest with small amounts every month.
They are automatically transferred from your Savings account to your Mutual Funds account once the investment plan is initiated. It is a safer option if you do not want to put your huge funds at risk.
The risks involved in Mutual Funds:
Sometimes you might lose a part of your principal amount due to the market risk. The power of purchasing might decrease due to inflation and the interest rates might decline the value of mutual funds.
There is currency risk which is also involved due to the decline in the exchange rate. The credit risk may arise if the issuer doesn’t have enough money to make interest payments and redeem the bond for the face value when due.
So mutual funds are both beneficial and also have that risk factor in them which allows the investor to think twice before letting their money. So, calculate the returns you are expecting and choose the right kind of mutual funds for better profits.