InvestorQ : How many types of mutual funds are there?? and how to select mutual funds??
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How many types of mutual funds are there?? and how to select mutual funds??

Answer
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Aastha Awasthi answered.
2 years ago


After you’ve decided to invest money in mutual funds, you have to deal with many questions regarding which funds you want to invest in. The choices are far too many- equity, debt, hybrid, tax-saving mutual funds, etc.

Additionally, you have to choose between buying the mutual fund directly and buying it via an agent. The former is the direct route, while the latter is the regular route of investing.

Direct mutual funds:

When you buy a mutual fund directly from a fund house, you are opting for the direct route of investing. You can invest directly in mutual funds only for three types of mutual funds:

1. Open-ended funds; except the funds that have either closed or withdrawn

2. New fund offers; including open-ended and close-ended

3. Interval funds

If you are investing in direct mutual fund, you will omit the role of an intermediaries such as brokers or agents. The amount you pay for your mutual fund will also be lower as the direct mutual fund is free from commission or distribution fees, which helps lower the expense ratio; expense ratio is the amount fund houses charge investors for the services they provide.

So, when you invest a lump sum amount or start an SIP in a direct mutual fund, you will not be levied any transaction charges as you are paying the mutual fund company directly.

Thus, if you want to invest directly in to any mutual fund, you could search for the direct option in the mutual fund documents to get your buying price or NAV amount.

Furthermore, depending on when an investor can invest in any mutual fund, mutual funds are categorised as:

Open-ended mutual funds: In an open-ended mutual fund, the investor can buy or sell the fund at any time of investing. They are like equity funds, as they have easy entry or exit options.

Close-ended mutual funds: In close-ended funds, investors can only invest when the issuer announces a new fund offer (NFO) of the scheme. Once the NFO is over, the debt mutual fund closes for investment. The fund matures after a predefined period, and the investor cannot exit like open-ended schemes. An investor can only exit the fund if it gets listed on the stock exchange.

Mutual funds are one of the best options for investors to invest their money and create long-term wealth. It is also one of the safest investment option in the otherwise volatile equity market. However, choosing the best mutual fund can be a daunting task for any mutual fund beginner. So, here are a few tips that can help you get familiarized with mutual funds.

Decide your investment portfolio How much you want to invest in which mutual fund is an important decision to be made. One needs to make the proper asset allocation for mutual funds to work in your favour. Your age, financial dependents, occupation, etc are a few of the determining factors. But a rule of thumb that needs to be followed is that you should invest the same percentage in debt funds as is your age. This means, if you are 35 years old, then only 35% of your investment should be in debt funds.

Select the right funds Choosing the right fund will depend on various factors such as:

  • Your financial goal: Is your goal to buy a new home, invest in your child’s education, securing funds for your retirement or just an addition to current income?
  • Time-frame: How soon do you need your money back? Depending on the time frame you are comfortable with, you can invest in various mutual funds.
  • Risk-bearing capacity: How much amount of risk can you stomach? This is a very personal answer and there’s no correct answer to this question. Park funds in debt funds if you want to play safe, but feel free to invest in small and mid-caps if you believe in no risk, no gain. And if a balance is what you are looking for, hybrid funds should be your answer as they offer a balance between returns and risks.

Lumpsum or SIPSystematic investment plan, or SIP, is the best way for a beginner to start the journey of investments, for it comes with an inherent disciplined approach. In an SIP, you give the bank a mandate to transfer a predefined amount in to the asset management company, which will then credit mutual fund units to your account.

However, SIP is not the only way to invest in the market. Say you have some lumpsum amount lying idle in your account, and you don’t have any major expense coming up, you could invest the amount in to a mutual fund of your choice. And if you invest on a day when the market is not performing particularly well, you also stand to gain more units of the mutual fund. Monitor your portfolio

Once you have invested your money in any mutual fund, it is of utmost importance that you monitor your portfolio and the gains/losses you are making, for only then can you take steps to minimise your losses or optimise your gains.

Additionally, you must also be aware of how the market is performing and what key trends are emerging. This can help you spot opportunities to create further wealth.