Types of mutual funds and how to invest – explained!

A mutual fund is an investment vehicle comprising a reserve of money accumulated from various investors. This combined financial resource is its portfolio. The fund invests this money in various securities implementing specific strategies. Qualified managers and staff ensure the smooth operations of these funds. Their roles include analysing numerous securities to find the most appropriate stock, bond, or short-term loan to invest in. They also monitor the progress of these securities on behalf of the investor. Several types of mutual funds are designed to serve a particular investor class. Investors choosing a mutual fund should consider their financial goals.

Why do people choose mutual fund investments?

Mutual funds are a top choice among investors due to their numerous benefits. For example, they provide professional direction eliminating the hassle of researching potential investments individually. The managers direct the analyses and selection of securities. They also monitor their performance.

Furthermore, these types of investments ensure the diversification of portfolios minimising the loss of funds. Their investments centre on an assortment of securities. Investors can withdraw their shares when they want. The redeemable amount depends on the current net asset value (NAV) and withdrawal fees. These funds are also relatively affordable.

Types of mutual funds.

Mutual fund investments can be classified into different types based on their function, structure, and features. Their categorisation also considers their risks and rewards.

The structural classification of mutual funds results in close-ended and open-ended schemes. Furthermore, according to their nature, their grouping gives rise to three types of funds: equity, balanced, and debt funds. 

Here is an explanation of some types of mutual funds. 

Open-ended schemes.

With these funds, investors can buy and sell units continuously. Therefore, they can enter and exit the scheme at any time. The cost of units during purchase and sale is based on the NAV.

Close-ended schemes.

These funds have a fixed unit capital meaning only a specified number of shares can be sold. Investors cannot leave the scheme until its expiry after a specified time. 

Fixed income funds.

These investments are also known as debt funds. Fixed income funds invest in debt-centred securities, including corporate bonds, government securities, and debentures. They are a constant, risk-free investment option. Subsets of debt funds are gilt funds, income funds, liquid funds, and short-term plans.

Money market funds.

The law limits their investments to high-quality, short-term options issued by governmental bodies. Therefore, these funds are relatively low risk.

Exchange-traded funds (ETFs).

ETFs deal with the daily purchase and sale of units on the stock exchange. Investments include a diverse portfolio featuring bonds, foreign currency, gold bars, and oil futures.

Equity funds.

These funds are renowned for their high-risk investments. Their main objective focuses on the ultimate capital gains; thus, they are called growth schemes. They invest in the highly volatile market over long periods ensuring high returns. Equity funds are further divided into index, diversified, and sector funds. 

A step-by-step guide on how to invest in mutual funds.

• Define your mutual fund investment ambitions. 

Investing in mutual funds is a great way of achieving financial goals. However, investors should consider the timeframe of their goals before putting money into a mutual fund. Many mutual funds cater to either long-term or short-term investments. 

• Use financial goals to develop a strategy.

Short-term goals of a month to a few years require investors to concentrate on reducing risk. These individuals may invest in EFTs and bond funds. These schemes ensure a steady income and investment growth with minimal risk. However, investors with long-term financial goals invest in high-risk funds such as growth funds. They let their money ‘sit’ in the fund for numerous years and wait for an appropriate time to redeem their shares.

• Research mutual fund organisations.

Prospective investors can find information on these organisations online on financial blogs or brokerage websites. Brokers recommend considering the various points before making a final decision. These include past performance, load fees, and administrative staff.

• Open an investment account.

After identifying the most appropriate mutual fund, investors open a brokerage account and deposit money. The fund’s deposit should meet the minimum monetary requirements for investing.

• Buy shares.

With an account, investors begin purchasing shares. Investors also put money into the mutual fund continually. An effective plan allows the investor to scrutinise their portfolio annually. Therefore, they can assess their risk management and profits.

• Strategise an exit plan.

Brokerage firms encourage investors to have a plan stating the most appropriate circumstances for their withdrawal from a scheme.

Conclusion

The main reason people give for failing to invest is the lack of knowledge. The financial concept of investment requires some knowledge of finance. Therefore, some people avoid investing despite its benefits in amassing wealth and safeguarding people against inflation. There are many forms of investment, with some being easier to grasp. Such an example is mutual funds which are easily understood. These investment options cater to people seeking long-term or short-term solutions. There are also seven types of mutual fund investments associated with low or high risk. Mutual fund investors have numerous choices that align with their financial goals.