How can I grow my money? There are so many investment options, but where should I invest? If these are your concerns as well, you can opt for mutual fund investments. But what exactly are mutual funds, and how do they work?
Mutual funds are nothing but investment schemes that pool in money from several investors. This pool of money is then invested into different asset classes such as stocks, bonds, securities, real estate etc. The company managing the mutual fund is known as an Asset Management Company (AMC). The best part about mutual funds is that a fund manager assigned to you manages the fund on your behalf. So even if you do not know about stock markets, you can rest assured that professionals handle your money.
There are various mutual fund schemes in the market that you can opt for based on your risk appetite, investment horizon and investment goals.
When you select a particular mutual fund scheme, the AMC will allot you the number of units as per the NAV of the fund. Net Asset Value (NAV) is nothing but the price per fund unit. Suppose you invest a sum of Rs. 5000 in a scheme, where the NAV is Rs.50. You will be allotted 100 units of the mutual fund scheme. Any NAV fund increase will be used to calculate the returns on your initial investment.
There are three types of mutual funds:
- Equity mutual funds:
Equity mutual funds are further classified into:
- Large-Cap: Investments in stocks of large-sized companies
- Mid-Cap: Investments in stocks of mid-size companies
- Small-Cap: Investment in stocks of small-sized companies Sectoral/Thematic: Investments in a specific sector or theme
- Debt Mutual Funds:
Debt mutual funds invest into debt instruments and are generally short term in nature with a duration of 2-3 years. They are also less risky as these investments are into high rated government-backed securities.
- Hybrid Mutual Funds:
These funds invest into both equity-oriented and debt-oriented investments and are therefore called hybrid mutual funds.
Mutual funds are an excellent investment avenue to be considered by anyone looking to invest in market-linked products.
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