Everything You Need To Know About Types of Mutual Funds


If you're investing for the first time or just want your portfolio professionally managed, go for mutual funds. They allow you to pool your money for a diverse selection of securities. Mutual funds bring you expertise, diversification, liquidity and the ability to manage inflation. There is a wide variety of mutual funds available. However, they can be divided into three broad categories:

Equity Fund

These funds invest in stocks of a variety of industries or may focus on a particular industry sector. The purpose of these funds is long-term capital growth. In such plans, you become a partial owner of each security in your portfolio. These funds are high risk because of the volatility of the stock market, but can also generate excellent returns over time.

Fixed income fund

These funds invest in securities such as bonds and gilts. The purpose of these funds is to provide the investor with current and stable income. Bonds can be considered loans in which the investor is the lender and the organization the debtor. Gold funds invest in government securities and are therefore safer than bonds. Fixed income funds are less volatile than equity funds and pose a lower risk. They provide only moderate returns, but guarantee the security of capital.

Dynamic bond funds invest only in fixed income instruments. The fund manager actively manages the duration of the portfolio of these funds according to its interest rate forecasts. This flexibility helps protect the investor from market volatility.

Money market funds

These funds invest in short-term debt securities. The objectives of these funds are preservation of capital and income. Returns are not significant compared to other types of mutual funds. However, they can earn about double the amount of an ordinary savings account. In addition, the risk is low and you will not have to worry about losing your capital. They also have a lot of liquidity. Overall, these funds are ideal for a conservative investor.

Balanced funds aim to provide a source of current income and long-term capital growth. These funds generally invest approximately 40% in fixed income securities and 60% in equities. This increased diversification helps to further spread risk.

Unit-linked insurance plans are similar to mutual funds. However, they combine the benefits of insurance and investments. These plans are provided by insurance companies and allow you to invest a portion of your premiums in different types of funds. They also enjoy tax benefits under Section 80C. ULIPs, however, have limited liquidity because they require you to remain invested during the specified period of the policy.

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