Mutual Funds are the most attractive asset class for passive investors who cannot track the markets on a regular basis. Due to diversity in their portfolio holdings, the risk of losing money because of the volatility of one specific asset class is minimized as the returns from other asset classes net off the risk. Therefore, mutual funds have become a go to investment security for investors.
On the basis of investment style, Mutual Funds can be of different types, like Equity Mutual Funds, Money Market Funds, Debt Funds, Hybrid Funds, Index Funds and Tax Savings Funds. As their names suggest, some funds comprise equities only, while some are largely composed of short-term money market instruments and others might be a mix of both. Index funds specifically tend to replicate the index like the Sensex or the Nifty 50, which cannot be otherwise traded on exchanges.
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On the basis of investment horizon, Mutual Funds can be classified as close-ended funds and open-ended funds. Close-ended funds are those which are open for a brief period of subscription and do not accept investments throughout the year. Open-Ended Funds accept investments throughout the year and hence, are more likely to see an increase in Assets Under Management (AUM) as compared to close-ended funds.
The fundamental goal of any investor is to maximize returns, which means get the best rupee value for every unit of risk taken. Therefore, it is important to do your own due diligence before entering into a mutual fund. Reading the detailed report, the factsheet and supporting documents can be a good place to start. Apart from these, a few metrics that you, as an investor, should look for are discussed below.
Mutual funds have gained significant popularity as a reliable investment option, offering diversification, professional management, and accessibility to a wide range of investors. By leveraging the expertise of professional fund managers, individuals can benefit from potential market gains while managing risk effectively.