Got a small bump in your salary or looking to get better returns from your savings, mutual funds are easy and one of the best investing instruments available for new as well as existing investors.
But before starting investment in MFs, one must keep a goal in mind and a time frame. Do you want to invest for short-term which is 1-3 years, medium-term around 3-5 years or long term which is over 5 years?
Depending on your time frame you can decide your risk appetite. If you are investing for a longer term, you can take higher risks, since there will be time to recover if those do not pan out, however, you should look at more conservative funds for a shorter period which are less riskier.
Since you are a salaried professional it will be better to invest in funds through a SIP, where you can invest on a monthly basis spread over time rather than a lump sum amount at one time.
Now let's look at the kinds of funds you can choose from:
Equity Funds: Equity funds mainly invest in stocks. In these kinds of funds, a group of stocks is chosen and you invest in them, and the gains and losses depend on how each stock has performed in the market. Equity funds have good growth potential and can generate significant returns over time and hence these also have a higher risk involved. These funds are better with a medium to long-term growth plan, however, if you are willing to take the risk, short-term investors can also invest.
Debt Funds: These funds are comparatively less risky than equity funds and are better suited for short-term investors. These invest in fixed-income securities like treasury bills, bonds and debentures. Since interest rates are mostly fixed in such funds and they have a fixed maturity date, the risk is minimal.
Money market fund: These funds invest in the cash market and short-term debt instruments and are good to park surplus money for the short term. These funds are run by the government in association with banks, financial institutions by issuing money market securities like bonds, T-bills, certificates of deposits, among others
Hybrid or balanced funds: These funds are a mix of bonds and stocks. The ratio is however fixed differently in different funds. One has 70 percent stocks and 30 percent bonds or vice versa and this ratio doesn't change in any given fund at any time. If you decide you want a higher percentage of bonds, you will have to exit the existing hybrid fund and invest in a new one.
Now that we know the basic types of funds, let's look at the structure of funds. There are two types available: open-ended and close-ended. In open-ended funds you can jump in or exit a fund any time you want however in close-ended there is a fixed period for the maturity of the fund and any early withdrawals will lead to a penalty. After the fund matures, you can keep your money invested or withdraw depending on your strategy.
An equity fund is further divided into various types of fund schemes. You can either choose on the basis of a sector like a fund with banks, auto firms, metal companies or other market capitalization like blue chips, midcap, small caps. Again, one must note that sectoral funds are higher in risk since if the sector isn't performing well neither is your MF. The same will be the case for midcap funds and smallcap funds, these are also high-risk high reward funds. There are also multi-cap that invest in a mix of midcap, smallcap and large-cap stocks.
Index Funds: Another type of equity fund is an index fund where you will be investing in an entire index. For instance, in a Nifty fund, you will invest in all 50 stocks under the Nifty index with the same weightage. It has very high growth potential and also helps trim losses since if particular stocks are not performing well there will be others that are rallying and offsetting the losses.
Tax Saving funds: Another important type of equity fund is a tax saving fund or Equity-Linked Savings Scheme (ELSS). The main purpose for such a fund is to save tax and can be used for deductions in 80C for up to ₹1.5 lakh per year. However, these have a lock-in period of 3 years and can be withdrawn only after that is complete. These investments are better as long-term investment instruments.
Now that we know the basics of mutual funds, one must decide where to invest depending on your investment strategy, risk appetite and time period for investment. It is safer to consult an investment manager in case of any doubt. Happy investing