Mutual funds are a great investment option for investors, both new and experienced. Since they pool the funds from multiple investors and invest in a basket of different assets, mutual funds come with inherent diversification. It also carries a slightly lower amount of investment risk compared to direct investments as well.
Contrary to popular opinion, mutual funds don’t just invest in the equity market alone; although a large number of them do concentrate their investments in the equity space. In fact, there are different kinds of mutual funds, categorised according to the asset class they invest in. Wondering what they are? Here’s a brief overview.
Mutual funds are broadly categorised into four different kinds based on the asset class that they invest in - equity funds, fixed income funds, money market funds, and hybrid funds. Let’s take a more in depth look at each category.
As the name itself signifies, equity funds are a kind of mutual funds that predominantly invest in the stocks of different companies. Since these funds invest in the equity market, they tend to carry high amounts of investment risk. That said, the potential for capital appreciation is also high with these kinds of mutual funds.
While the general theme of equity funds are the same throughout, not all of them are similar or comparable to one another. While some equity funds may choose to invest in just one or multiple sectors, others may try to mirror an index like the Nifty 50.
Also known as bond funds, fixed income funds invest a major portion of the investors’ money into bonds issued by corporations and the government. Unlike equity funds that rely on capital appreciation from share price growth, the goal of fixed income funds is to provide a steady source of income to the investors.
Also, the return generating potential of fixed income funds is not as high as equity funds. However, fixed income funds are considerably safer than equity funds. Due to the relatively safer nature of these funds and their ability to provide steady income, investors try to include these funds into their portfolio along with equity funds.
Although they might sound very similar to fixed income funds, money market funds are a different category altogether. These funds tend to only invest in highly rated, short-term investments issued by the government such as certificates of deposits, T-bills, short-term bonds, and dated securities, among others.
Since these funds majorly invest in government securities, they tend to carry the least amount of risk among all the 4 kinds of mutual funds. This makes money market funds the perfect option for risk averse investors looking for a steady return on their investments.
Also referred to as balanced funds, hybrid funds invest the pooled money into both stocks and debt securities. The ratio of investment in both stocks and debt securities depends on the fund manager and can either be fixed or variable in nature.
Usually, fund managers of hybrid funds tend to go for a 60-40 split between stocks and debt securities, where 60% of the funds are invested in stocks and the remaining 40% is invested in debt.
There you have it - the four kinds of mutual funds. Since there are multiple subcategories within these four kinds of mutual funds, always remember to read through the mutual fund documentation thoroughly to ensure that they conform to your needs and requirements before investing in them.
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