For a first-time beginner, investing in mutual funds might seem a little complicated. However, after getting familiar with how mutual funds work, you will realise how this investment tool can prove to be great for financial growth. The number of mutual fund investors is on the rise every year in India, as mutual funds are considered to be a simple and effective way of building wealth.
If you are a beginner considering this type of investment, here is a guide that will help to invest in mutual funds:
What is a mutual fund & how does it work?
A mutual fund is an investment product that takes the money collected from a group of investors to invest in various securities. These securities include bonds, stocks, gold, as well as money market instruments. The money invested in these securities is managed by a fund manager that overlooks each fund, with a goal of earning maximum returns. The income that is generated by the fund is then distributed among the investors.
Different types of mutual funds
- Equity funds
In equity funds, a primary portion of the investor’s money is invested in stocks. While capital appreciation is an important goal for these funds, their returns depend on market movements. This means that equity funds hold higher risk.
- Debt funds
In debt funds, the investor’s money is placed in corporate bonds, government securities, as well as money market instruments. These funds are more focused on offering regular returns and are usually considered as low-risk.
- Hybrid funds
Hybrid funds are a balance of equity and debt funds. These could be the best mutual funds to invest in for those who prefer making equity as well as debt investments.
Things to consider before investing
- Make sure to diversify your investment profile
Investing in more than one mutual fund will help in diversifying your investment portfolio. This will help in setting a balance across investment styles and asset classes, thereby evening out the risks.
- Consult a financial advisor
Making mutual fund investments can be overwhelming for a beginner. Choosing from various mutual fund schemes is just the start, after which you also need to be monitoring their progress. So, it is advisable to consult a financial advisor or a mutual fund expert on how to invest in mutual funds.
- Do not base your decision entirely on past returns
While a fund’s previous performance is definitely a factor to consider before investing, it is not the sole criterion. You need to consider numerous other factors such as the expense ratio, as well as the AMC/fund manager’s track record before deciding to invest.
Investing in mutual funds is a very convenient process. You can study the market’s progress and make your investments accordingly. The best part about this is that you can even start off with a low investment. Lastly, your investments are managed by an experienced fund manager that allocates your assets based on a well-thought-out investment strategy. This way, investing in mutual funds can help grow your corpus.