Mutual funds allow you to explore different sectors and asset classes while reducing the risk involved as the funds are managed by professional fund managers with years of experience. However, before you decide to invest in mutual funds, understanding its different types is crucial, which we will cover in this article.
Different Types of Mutual Funds
Here are different types of mutual funds in the market. You can also enroll in the best investing courses from Upsurge.club to understand the concept better.
1. Equity Funds
These mutual funds gather investments from multiple investors and invest them into shares of various companies. The returns depend on how these invested shares perform in the stock market—whether they rise or fall in value.
Regarding taxation, selling the units within a year is considered short-term and taxed at 15%. For units held over a year, gains up to Rs 1 lakh are tax-exempt, and anything above that is taxed at 10% without indexation benefits.
2. Debt Funds
Debt funds park funds in fixed-income securities like bonds, government securities, and treasury bills. These instruments offer a fixed interest rate and maturity date.
Debt funds are suitable for investors seeking regular income (both interest and capital appreciation) with relatively lower risk.
3. Money Market Funds
Money market funds park your money in short-term money market securities like bonds, T-bills, and certificates of deposit.
The fund manager disburses regular dividends to investors.
Opting for a short-term plan (not exceeding 13 months) can significantly reduce investment risk.
4. Hybrid Funds
As the name suggests, hybrid funds (balanced funds) consider both bonds and stocks.
The taxation of hybrid funds is based on equity exposure. If the equity component exceeds 65%, the fund is taxed like an equity fund; otherwise, it follows debt fund taxation rules.
5. Tax-Saving Funds
These funds are also known as Equity-Linked Savings Schemes (ELSS). They offer tax perks under Section 80C of the Income Tax Act.
Tax-saving funds primarily invest in equities, with a lock-in period of three years. They allow you to save taxes while potentially earning good returns.
How to Pick the Best Mutual Funds?
The strategy to pick the best scheme is mentioned below.
- Understand Your Goals: Begin by clarifying your investment objectives. Are you saving for retirement, a child’s education, or perhaps a down payment on a home? Your goals will dictate the type of mutual fund most suitable for you.
- Assess Your Risk Tolerance: Every investment carries some level of risk. Gauge your comfort with potential fluctuations in your investment value. If you are risk-averse, debt mutual funds might be more appropriate. Conversely, equity funds could be better if you are open to higher risk for potentially greater returns.
- Consider the Investment Horizon: The length of time you plan to invest impacts your choice. Short-term goals may require more liquid and less volatile funds, while long-term investments can weather the ups and downs of equity funds.
- Evaluating Fund Performance: While previous performance is not a reliable indicator of upcoming results, it can offer valuable insights into how the fund has navigated different market conditions. Look for consistent performance over a period rather than short-term gains.
- Check the Expense Ratio: This is the annual fee that the fund charges for management expenses. A lower expense ratio can result in significant savings over time, especially for long-term investments.
- Research the Fund Manager: The fund manager’s expertise and experience are critical. A seasoned manager with a robust track record can be a worthy asset to your investment.
- Diversification: Ensure the fund provides a diversified portfolio, spreading your investment across various sectors and assets to mitigate risk.
Conclusion
Choosing the right mutual fund is a personal decision that involves careful research and understanding your financial situation. Make your choice thoughtfully and consider getting professional advice if necessary. To learn more about investing in this investment option, consider enrolling in Upsurge.club’s mutual funds course.
