Mutual funds are a collection of stocks or bonds managed by an individual or an asset management company. Depending upon their risk appetite of investment investors is going to put their money into various classes of funds. For most of the investors, mutual funds income tax exemption has become popular. The main reason being the automatic diversification they offer with customization and liquidity.
One of the notable features of mutual funds is that you can invest with small amounts. In fact you can even start as low as Rs 500 and take it further from there. No other type of funds would provide you with the scope of diversification like mutual funds.
Clearly understand the benefits of investing in mutual funds
Investing your hard earned money is really important. The main reason for you to invest is not to work hard for your entire life. There are a couple of ways to let the money work for you and one of them is to work hard and the other is to let the money work for you.
Though everyone would say that investing in stock markets is a better option, everyone would be of the opinion that investing in stocks via mutual funds would be a worthy option to consider.
- To invest in stocks takes a lot of time in terms of research whereas in mutual funds you might have to spend less time
- A reasonable amount of cash is needed to diversify your portfolio of stocks. Mutual funds by default have a diversified portfolio.
So for all those who want to invest in stocks and do not possess proper knowledge then investing in mutual funds would be the best foot forward. Investing in equity market is a major risk which not everyone is going to take a plunge.
Outline the various types and categories of mutual funds
Mutual funds are classified as per the asset class in the form of bonds and shares. You can classify them as per strategy and style. To clearly understand on how a mutual fund is classified helps an investor in order to choose the best funds for asset allocation and even for the purposes of diversification. There are three basic types of mutual funds in India which are asset, debt and balanced mutual funds
Figure out the risks associated with mutual funds
Mutual funds are clearly subject to market risks. This is a slogan that you might come across on the boards of mutual fund companies. Investments are known to vary across risk spectrum and there is hardly any investment which does not have risk associated with it. One of the striking features of mutual fund investment is that you can invest as per your risk appetite.
The risk level depends upon the type of mutual fund that is chosen by a mutual fund manager. The golden rule which exists higher the risk of mutual funds more returns you can expect. The levels of risk with mutual fund depend upon market and liquidity risk.