Mutual funds are an ideal vehicle for wealth creation. If an investor follows a systematic and disciplined approach, they can help build wealth over a long-term investment horizon.
Mutual funds are classified according to their structure, asset class, and investment objectives. Needless to say, investors should choose the right type of fund depending on their financial goals.
Here’s the lowdown on a few types of mutual funds based on their asset class:
Equity funds: Such mutual funds invest in equity stocks and shares of different companies. These are high-risk funds. However, they also tend to provide high returns. Within equity funds, there are specific funds like infrastructure, fast-moving consumer goods (FMCGs), pharmaceuticals, and banking, among others. An equity fund is linked to the market, and tends to be volatile – the fund’s value fluctuates with market movements, and also with that of stocks in the fund portfolio.
Debt funds: These funds invest in debt instruments such as company debentures, government bonds, and other fixed-income assets. Debt funds are considered safe investments, and they provide fixed returns and come with a maturity date.
Money Market funds: These types of mutual funds invest in liquid instruments like treasury bills (T-Bills), certificates of deposits, commercial papers, etc. As the government runs it in association with other banking, financial institutions, and corporations, they are comparatively less risky, and the returns are also moderate.
Balanced or Hybrid funds: These are funds that invest in a mixture of both debt and equity segments in a certain ratio. In some cases, the proportion of equity is 60-65% while that of debt is 35-40%; or it can be the other way round, too. The risk and returns are balanced out this way.
Mutual funds are highly liquid and it is easy to invest and redeem units, within a matter of three-four working days. Investments in mutual funds, if started early, and if you invest in an appropriate scheme following a disciplined plan such as a Systematic Investment Plan (SIP) then an investor can successfully build long-term wealth over a period.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.