What is a mutual fund? What are the types of mutual funds? How to select mutual funds?

Have you ever realised what is the type of mutual fund you should be in for fulfilling your focused yet relaxed goal?

A mutual fund is an investment system where money is pooled from many investors and managed by a professional manager. Here in this blog we will discuss different major types of mutual fund.

Types of mutual funds

1. Equity mutual fund
2. Debt mutual fund
3. Hybrid mutual fund

1. Equity mutual fund

These funds invest your money in equity or stocks. That also has different categories. It could be…

Large capital: top 100 companies are called the large capital.

Mid capital: which could be from 101 to 250th companies.

Small capital: companies below 250.

2. Debt mutual fund

This type of mutual fund is like a fixed deposit. You get an assured income, and because the risk is less in this, the return is also less

3. Hybrid mutual fund

It will have some part of equity and some of debt. It naturally is a balanced fund. If you don’t want to take risks, but at the same time, you don’t want to play too safe like in a debt mutual fund. Then, you should have a hybrid mutual fund for investing.

Step- by – step guide for choosing the investable mutual fund scheme

1. Define your financial goals:

Clearly outline what you want to achieve with your investments, such as investing for retirement planning, a child’s education, marriage, etc. This will help you choose an appropriate asset class mix and, based on that, suitable mutual fund schemes. Additionally, using a mutual fund SIP calculator can assist in estimating potential returns and planning your investments more effectively.

2. Assess your risk Tolerance:

Understanding your comfort level with market fluctuations is very important. Equity funds come with higher risk and potential for higher returns, while debt funds offer potential returns.

3. Consider your investment horizon:

Choosing the asset class also depends on the tenure of your investment. Equity funds are suitable for long-term investments (five years or more), while an investor may consider the best fund for short-term investments.

4. Analysis of fund costs:

Pay attention to the expense ratio associated with mutual funds. all type of mutual funds is having expense ratio. It is like brokerage and maintenance cost to the fund house like we pay in case of stock buying and selling.

Lower costs significantly impact your overall returns, so opt for funds with competitive fees. Generally, passive funds have a lower cost of investment. One should consider consulting their financial advisor before investing.

5. Review fund manager expertise:

The fund manager is a professional who manages your funds by investing the fund corpus, and hence, an experienced and skilled manager may help the fund’s performance.

6. Diversify your portfolio:

Investing in different categories of mutual funds helped spread risk across different assets. A diversified portfolio can help manage market volatility in your investment.

7. Understand Tax implications:

For Equity mutual fund, long-term capital gains (LTCG) are taxed at 12.5% if held for more than one year and exceed Rs.1 25lakh annually. Short-term capital gains (STCG) are taxed at 20% if held for less than a year. Now, the tax on debt mutual funds is applied at the marginal tax rate. Irrespective of the investment tenure

Conclusion

An individual may have multiple goals with different time horizons, and each goal has to be managed separately. For instance, if an investor is planning to buy a house after ten years, they might consider investing a portion of their income every month via a systematic investment plan.

Well, considering the 10 year time horizon here in this case it might be a mix of hybrid and equity mutual funds. Because in case of hybrid it is always managed by the fund manager in a smooth way so that it will not go huge down in market crash timings provided you are doing SIP.

If the investor is aiming for higher returns, an equity fund could be considered. Here is a comparison of how the final corpus would look with different allocations and expected returns.