How to invest in mutual funds

It is important to know about investment details as not taking proper charge of your finances could lead to financial instability in the future. Before we directly get into the topic of this article, it is important to have a basic idea about mutual funds.

In simple words, a mutual fund is a company which pools together money from many people and invests it in stocks, bonds or other assets. It can be defined as a single portfolio of stocks, bonds or cash managed by an investment company on behalf of investors. Here investors can put a very little amount of money into one or more than one funds and in return get the opportunity to diversify their investment options.

Let’s take a look at the various types of equity and debt mutual fund schemes.

Equity or growth funds

These types of schemes are categorised as high-risk schemes, on the other hand they have a high return potential in the long-term too. It could be said that these schemes are ideal for the investors who are in the prime earning stage.

Money market funds

These funds are ideal for investors with a low-risk appetite. They are the short-term debt instruments; they have the potential to give suitable return to all the investors over a short period of time.

Fixed income or debt mutual funds

These funds invest the majority of the money in debt – fixed income. They have a low–risk– low-return outlook which makes it the ideal for those investors who don’t want to take a high risk while investing.

Balanced funds and Hybrid funds

Balanced funds are schemes that divide the investments between equity and debt. Hybrid funds are similar to balanced funds but the only difference is, lesser amount of equity assets.

How to invest

· The first and the most important step is to identify the purpose of investing. It is important to know the investment goals, it could be education, marriage, retirement or anything. If one has a specific goal or aim then that person will eventually have a significant clarity on how much wealth he or she wishes to accumulate in how much time.

Also read: How to start investing, trading in stock market

· A person who wishes to invest in mutual funds should have a concrete understanding of risk tolerance and detailed knowledge of all the aspects of mutual fund schemes. The mutual fund market is flooded with diverse options. Before investing, investors have to make sure that they have explored all the different kinds of schemes available in the market so that they know what would be the best option for them.

· In order to invest in a mutual fund, one needs to follow the KYC (Know Your Customer) guidelines and for this the investor will have to submit copies of address proof, PAN (permanent account number) card, age proof and other documents specified by the fund house.

Conclusion

We all should remember that investing in mutual funds has a set of risks, as discussed above. Schemes offering high return are accompanied with a high risk too, one should only invest in high equity schemes if that particular person has a high risk appetite.

On the other hand, there are many debt schemes available too, a person who is fine with a moderate return, can opt for those schemes. If anyone is not sure or has doubts regarding the schemes, it is better to seek help from a financial advisor for proper guidance as taking care of finances is equal to taking care of the future.