Beginner’s Guide to Mutual Funds Investment

Mutual funds are labeled according to their risk, type of investment, and goals. One has to make a decision of choosing a mutual fund that fits their risk appetite and financial objectives.

A mutual fund is owned by an Asset Management Company. Mutual Funds pools in money from various investors to form a corpus. This corpus then is managed by experts and invested in various forms of securities. It is invested in stocks, bonds, debts, other money market instruments, etc. Mutual funds are labeled according to their risk, type of investment, and goals. One has to make a decision of choosing a mutual fund that fits their risk appetite and financial objectives. Generally higher the risk higher the reward.

Your Fundamentals

1. Why are you investing in Mutual Funds?

There has to be a clear understanding of why one is investing and why it is being done through mutual funds. Often dissatisfaction arises from a flawed understanding of the financial product and the goals it may achieve in a certain time.

2. Not all mutual funds invest in stocks

Mutual Funds are of various kinds generally defined by the financial products they invest in and the risk they carry because of it. Often the return is better with higher risks and vice versa. It is a misunderstanding that mutual funds are bundled stock investments.

3. How to choose?

You have to have a clear understanding of the financial goals you choose to pursue. Before choosing a scheme based on ratings and past performances, you should make a calculated judgment of your corpus, the goals you want to achieve in what timeframe, and your risk profile. You can always find the right scheme with the right mindset and there is always a mutual fund scheme for every investor.

4. It might not be that simple

Often debt funds are used to park your funds for a few months to a few years and equity funds are used to grow your money. But in the same manner debt funds are less riskier than equity ones. All these complexities could be understood with the help of an advisor and in our case SDK investments are there to do just that. 

Types of Mutual Funds:

1. Large Cap Funds

These schemes offer modest returns but are often consistent and less risky. It is so because these schemes invest no less than 80% of their corpus in the top 100 companies. The to[p 100 are determined by their market capitalization and since they are big enterprises they are unlikely to fail and also unlikely to give growth like smaller companies. They often give consistent growth with moderate risks.

2. Multi-Cap Fund

These schemes invest in all three categories of stocks; large-cap, mid-cap, and small-cap. These invest at least 65% of their corpus in stocks. These generally have better returns than large-cap funds but have moderate risks.

3. Large & Mid Cap Fund

These funds invest 35% each in Large and Mid Cap stocks increasing their risks along with their returns.

4. Mid Cap Fund

With an investment of 65% of their total corpus in mid-cap funds, these schemes turn out to be riskier than others and are suitable for risk-taking high-profit earning investors.

5. Small Cap Fund 

These funds have a higher risk than most with 65% of their corpus in small-cap funds. But as the nature of these funds suggests these have the potential for high returns with such risks as well.

6. Dividend Yield Fund

These funds invest in stocks that give periodic dividends. These funds payout dividends periodically and are oriented towards investors who want constant periodic payouts for their investments.

7. Value Fund

These too invest in stocks with up to 65% of their corpus. In these funds, the fund manager invests in stocks that in his professional judgment are undervalued.

8. Focused Fund

These funds invest in 30 companies’ stocks of a particular segment. The segment would be mentioned (Large-cap, mid-cap, small-cap). These can give high returns but are equally risky as these stocks would be chosen by the fund manager.

9. Sectoral Fund

These funds are sector-oriented, investing at least 80% of their corpus in stocks of companies chosen from that particular segment (e.g. IT, Pharma, Infrastructure, etc.). These can have high returns if the sector does well or vice versa.

10. Equity Linked Saving Scheme

They invest 80% of their total corpus in stocks with a 3-year lock-in period. They are oriented towards tax Saving.  

Leave a Reply

Your email address will not be published. Required fields are marked *