What better way to describe mutual funds than as the mother of all investment avenues! You invest in the country’s economic growth, you get to do this through an expert, you receive higher returns as compared to other investment avenues, you have the flexibility to change the investment amount as your income grows and you can withdraw any amount whenever required.
How Mutual Funds Work
Different types of mutual funds cater to different kinds of needs. There’s something for everyone.
Types of Mutual Funds
Mutual funds are categorised based on the kinds of assets the fund invests in.
- If you’ve paid to own a tiny fraction of a company, it’s called a share.
You become an equity shareholder, or simply put, an owner. And the share is your asset. - If you’ve lent money to a company, the company is in your debt.
The company is liable to pay this amount to you, which makes this amount an asset for you.
So, while there are only two types of “asset classes”, namely Equity and Debt, there are three types of mutual funds. Equity, Debt and a combination of the two, called Hybrid.
All other categories of mutual funds fall under one of these three types. Every other name you hear, be it a “Large Cap Fund” or a “Liquid Fund” or an “Index Fund” or a “Balanced Fund”, they’re all sub-types of the above three.
I don’t want to go into the details of the sub-types just yet. To get the fundamentals right, we must first know the difference between Equity and Debt.
How to pick these funds
Picking funds is easier than picking out a restaurant to go to, or in the current scenario, the menu for the day. Restaurants and food choices involve a lot of factors, like your mood, the distance, the availability of the ingredients, and a lot more. Picking a mutual fund, however, is as straightforward as looking at the clock and knowing what meal you’re having next – breakfast, lunch, or dinner! You’re probably thinking that’s a gross oversimplification, but it took you a while to learn how to read a clock, right? And that wasn’t too hard. It’s the same with mutual funds.
Time is the key. Setting your financial goals is a major contributor to mastering the art of fund picking.
- What are you saving towards and for when? Retirement, travel, higher education, a house?
Whatever it is, write it down, numbers and timelines. - Head over to this Value Research page: https://www.valueresearchonline.com/funds/
It’s a great place to start exploring the world of mutual funds.
All schemes of all types and sub-types are given a star rating, ranging from 0-5 stars. - Schemes with higher historic returns and lower expense ratios are keepers.
- Once you’ve narrowed in on a type and subtype based on your goals, it doesn’t make much of a difference which scheme name you choose.
Pick any 5 star rated scheme and you’re set!
A lot of people tell me that mutual funds are too risky for them. It reminds me of what Warren Buffet very rightly says.
“Risk comes from not knowing what you’re doing.”
As another week comes to a close, I’m struck with the thought of how we’re all doing when it comes to managing our finances during this crisis. Should you invest in mutual funds or should you redeem your existing funds? Sensible money management is absolutely essential during this time and mutual funds are the best way to go.
