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What are the safest and riskiest kinds of mutual funds?

By Finserv MARKETS - Aug 28,2019
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What are the safest and riskiest kinds of mutual funds

Mutual funds are the kind of investment instrument that appeals to all classes of investors, owing to their versatility. They bring together a bouquet of funds, and investing across these funds ensures a balance of returns and security. There are several different types of mutual funds that differ on the focus of their funds. While some types of mutual funds invest exclusively on equity stocks, others may invest more on debt securities while the best mutual funds may manage both kinds of funds to ensure a healthier balance.

In general terms, equity stocks are considered riskier but offer higher returns whereas debt securities offer lesser returns but are more secure. Investors usually appoint mutual fund managers who can either choose to actively or passively manage the fund. Active management of a mutual fund refers to when the manager buys or sells investments in an attempt to outperform the overall market’s returns or any other benchmark identified by them. Passive management of a mutual fund refers to buying a portfolio of securities and are designed to track the benchmark index’s performance. The only time the fund’s holdings are adjusted is when there is an adjustment in the components of the index.

Before investing in a mutual fund, it is essential to understand your own requirements and expectations. If you are looking to invest in the short-term, the kind of mutual fund you opt for would be different than if you were looking to build a corpus over the long-term. Every mutual fund would have different risk and return characteristics, regardless of whether they are among the same types of mutual funds.

You could speak to financial advisers who can guide you on the best mutual funds for your requirement, and advise you on where and how much you should invest. Investing in mutual funds on Finserv MARKETS allows you to benefit from the advice of a qualified intermediary who can guide you as per your risk appetite and goals. The platform allows you to invest in equity funds, debt funds and even hybrid funds which invest in a mix of debt and equity. Depending on the strategy preferred by the investor, the combination of equity and debt will vary.

Different types of mutual funds are classified into safe and risky funds. This can be attributed to a lot of reasons. Read on to learn about the most common types of mutual funds, and learn how they can serve your objective based on your plans.

1. Money market funds

These are the mutual funds that invest in short-term fixed income securities including government bonds, treasury bills, etc. These funds usually face low risks, but also offer lower returns as compared to other types of mutual funds. However, they are a good place to start for new investors and are ideal for low risk appetites.

2. Fixed income funds:

These funds invest in stocks that offer a fixed rate of return such as high-yield corporate bonds, investment-grade corporate bonds or even government securities. The risk of investment is low here, since the fund is aimed at generating a fixed rate of return. However, among these too, the funds investing in investment-grade bonds and government securities are considered to be safer than the high-yield corporate bonds.

3. Balanced funds:

Balanced funds, as referred to above, usually involve a healthy mix of equity stocks and fixed income securities. Most of these funds have a strategy that they follow to ensure a balance between risks and returns. For instance, conservative funds would emphasise more on ensuring security more than returns and would invest more heavily into fixed income securities than equity stocks. However, the more aggressive funds would be more focussed towards equities than fixed income securities, in a bid to generate higher returns. Hybrid funds, available on Finserv MARKETS, lets investors choose between a wide variety of funds based on their risk appetite. While some of the funds have a more conservative strategy which guarantees definite returns and offers higher security, the other kinds may involve higher returns but promise lesser security since they invest in funds more dependent on market forces.

4. Equity funds:

Equity mutual funds include within their portfolio different equity stocks. The funds may be selected according to the fund manager’s knowledge and the strategy would be aligned more towards gathering higher returns. These mutual funds are more susceptible to market risks, since equity markets in general are subject to fluctuations owing to different market forces including economic and political stability regionally and globally.

5. Index funds:

Index funds are aligned at tracking the performance of a specific index such as the Nifty 50. Returns from this kind of mutual fund are based completely on the performance of the index. These funds do cost lower for investors, since these do not require the fund manager’s active involvement.

Of all the funds mentioned above, equity mutual funds are probably the riskiest since they depend completely on market forces. These would require the fund manager’s active involvement to stay ahead of the market trends, and are thus costlier to invest in as well. Fixed income funds and money market funds are the safest types of mutual funds since they invest in securities that ensure definite returns. However, the returns earned on them would be lower too. Balanced mutual funds are the best mutual funds since they allow investors or fund managers to invest across securities that guarantee returns as well as security of the funds invested.

Investing in mutual funds, on Finserv MARKETS, lets investors open their account for free. They can also choose to invest through direct mutual funds, which charge 0% as commission fees. The platform however, also offers investors the services of qualified intermediaries who can guide individual investors towards investing in mutual funds based on their risk appetite and expected returns.

Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no-cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!

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