Are you looking for investing money in mutual funds? Before you start investing in mutual funds, you should know what is mutual fund and how you can generate money from it. Investing in mutual funds is a high-risk method to make money. So, not everyone wouldn’t be willing to invest in mutual funds. However, through this article, we help you understand what a mutual fund is and how does it work.
What is a mutual fund?
A mutual fund is a company that collects money from people those who share common investment objectives and invests the collected money in equities, stocks, bonds or other securities.
It is managed by an experienced fund manager. The income obtained from this investment will be distributed among the investors and in return, investors need to pay some amount of money as their fees.
There are different types of mutual funds based on the objectives of investors:
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Equity mutual funds or stock mutual funds are the funds that invest mainly in stocks or shares. There are two types of equity mutual funds: Active and Passive. In Actively managed funds, the fund manager analyses the performance of companies and invest in the best stocks. In Passively managed funds, there wouldn’t be any fund manager to make investment decisions. It involves a portfolio that includes the chosen market index. These types of investments are suitable for long-term investors.
In a balanced fund investment, the funds are invested both in equities and fixed income securities. Balanced fund investments are ideal for investors those who are looking for a regular income and capital appreciation.
Debt funds are mutual funds mainly invest in bonds, government securities, and debentures. This type of investment generally suitable for investors those who are interested to take low risk. It provides investors a regular income while ensuring the safety of capital.
In liquidity funds, funds are invested primarily in the money market or short-term securities such as treasury bills, certificates of deposits, term deposits and commercial papers.
The gilt fund is a category of mutual fund and it is completely invested in the government securities. Therefore, gilt funds are the more secure way to invest but it is related to the fluctuations in the interest rate.
There are two important things you should keep in mind while investing in mutual funds:
Invest for long-term
Long-term investment in mutual funds helps investors to earn compound interest, i.e. interest on interest. When an investor decides to invest money in mutual funds, think about investing for a period of more than 10 years.
Choose the appropriate type of investment
Most of the people are interested in investing mutual funds as it helps them to make money without any hazzle.
- If an investor invests money for 3 years or less than 3 years, invest in debt funds as it ensures the safety of the capital and provides a regular income.
- If investors are thinking to invest for more than 5 years, balanced funds are the ideal solution as it allows investors to invest in debt and equity funds.
- If an investor invests for more than 10 years, equity funds are the more suitable option. Investments in equity funds can offer compound interest for a long period of time.