A mutual fund is a professionally-managed financial instrument, usually run by an asset management company. The fund is made up of money collected in from several investors who share a common (‘mutual’)investment objective.
The mutual funds are managed by fund managers who are professionally qualified and well experienced. The collected money is then invested in various other financial instruments such as bonds, equities, and/or other securities.
TYPES OF MUTUAL FUNDS
There are mainly 3 types of mutual funds
1. EQUITY FUNDS
2. DEBT FUNDS
3. HYBRID FUNDS
Let us now see the above types of mutual funds in detail
1. EQUITY FUNDS
Equity funds are those mutual funds where the investment is made in the shares of different companies (that is, 60% of the total assets of the fund are invested in the shares of different companies). They are also called ‘Stock Funds’.
Equity funds are generally long term (we can get long term capital growth). Hence, it is called ‘Growth Funds’.
These funds generate more returns when compared to the debt funds but the amount of risk associated with equity funds is higher than that of debt funds. This happens because the performance of equity funds is based on the stock market conditions and also the performance of companies included in the fund portfolio. So if stock market crashes or stocks in the portfolio underperforms, fund value falls.
2. DEBT FUNDS
Debt funds (also called ‘Bond Funds’/ ‘Income Funds’) are those mutual funds where the investment is made in corporate bonds or other debt instruments.
These are securities that generate a fixed income (regular income) upon investment and are less volatile (less risky) when compared to equity funds.
A high amount of liquidity, tax benefits are also the other advantages of debt funds.
3. HYBRID FUNDS
As the name suggests, hybrid funds are a mixed type of mutual fund investment. Here, the investment is made in both equity funds (usually 60%) and debt funds (usually 40%) i.e. a combination of stocks and bonds.
Hence hybrid funds help to create a balanced portfolio for the investors. The benefit obviously will be the advantages of both equity and debt funds. The risk is lowered and we can have optimal returns through investment in hybrid funds.
