Mutual Funds are preferred by salaried community over many other forms of investment due to their flexible nature. Mutual funds investment can be made in an amount as small as Rs. 500 with no limitations on time. Another part of mutual funds that investor should not avoid is the potential risk involved. Therefore, understanding them is crucial in order to prevent financial loss.
What is a mutual fund?
A mutual fund is a type of investment that pools money from many investors and invests them indifferent types of securities such as stocks, bonds, and short-term debt.It collects funds from different investors to invest on their behalf. They provide beneficial options to the investors that have not well versed with the concepts of investments.
Following types of mutual funds available in India,
- Solution-oriented mutual funds
- Equity mutual funds
- Debt mutual funds
- Hybrid mutual funds
Various vital factors define these categories and separate them from each other. Some of these critical factors are thematic exposure, investment horizon, etc. Mutual Funds are diverse, and thus, selecting a suitable option can be overwhelming, especially when you are a beginner. Here are some smart investment tips for beginners,
Understanding the risk
The first thing to understand about mutual funds investment is the risk involved. There is an old rule about mutual funds, the higher the risk, the more will be the returns.
Furthermore, the risk involved in mutual funds differs as per their types.
- Equity Funds: Mid and small-cap equity funds have the highest risk and offer great rewards.
- Debt Funds: Debt funds involve low risk, and thus, offer lower returns.
- Hybrid Funds: They invest in both debt and equity markets, thus balance between risk and returns.
Establishing your portfolio
As a beginner, you need to decide the type of portfolio you need to develop, which is also known as asset allocations. It is a method to determine the amount of money you want to invest in different types of investment options with a combination of asset classes.
Deciding the investment goals
After the risk analysis, you need to define the amount as well as time for the investment. As mutual funds are flexible, you can invest and redeem the funds as per your choice. Due to the flexibility, you can freely choose the type of mutual fund that aligns with your investment goals. Following are some of the types of mutual funds that will enable you to achieve respective goals,
- Equity Linked Savings Scheme: ELSS is considered one of the best option to save tax as well as to stay invested over a long time.
- Liquid funds or Ultra Short Term Funds: They are best if you want to invest for short term and receive higher returns than a savings account.
Influence of NAV on mutual funds
NAV is the price per unit value of any mutual fund, and it has no role in predicting their performances in future. That is why returns on the mutual fund are described in percentage growth figures. Regardless NAV is high or low, the performance of the fund is the only factor that influences the growth of the investment as a percentage.