Investors are looking for avenues that help them grow their money and achieve their financial goals. Investing in stock markets is one such avenue that can help investors grow their money over the long term. But investing in the stock market may not be easy for the first-time investor. Mutual Fund investments on the other hand simplify the process of investing in a pool of diversified stocks, thus taking the hassle out of stock selection for beginners by allowing them to invest in mutual funds.
The meaning of mutual funds is that it is a financial instrument that essentially collects money from investors and puts them in a basket of diversified securities. Let’s understand more about mutual funds and its types.
Types of Mutual Funds
There are three types of mutual funds classified based on their underlying assets. These include:
- Equity Mutual Funds: Equity Mutual Fund is a type of mutual fund that invests in stocks that have the potential to grow and generate wealth over the long term. These funds can, in turn, be classified based on market capitalization, i.e. Large cap, Midcap and Small-cap. It can also be classified based on a theme or a sector such as healthcare or IT. Investors can choose equity funds based on their investment horizon and their financial goal.
- Debt Mutual Funds: Debt Mutual Fund is a type of mutual fund that invests in fixed income securities issued by the Government or corporates. These include treasury bills, certificates of deposit, debentures, corporate bonds, etc. These can be classified based on their duration (short-term or Long Term Debt Funds called Gilt Funds).
- Hybrid Mutual Funds: This is a type of mutual fund that invests in debt, equity-related instruments and gold or other commodity. The objective of this fund is to balance the risk-reward potential for its investors. The equity component enables capital appreciation thereby generating wealth for investors while the debt component acts as a portfolio diversifier and diversify the impact of volatility.