Investors can select a fund based on their investment horizon and risk profile. The greater the risk involved in a fund, higher will be the returns that are expected to be generated. The contrary of this statement also holds true as the market witnesses a debacle, the investor might also have to come to terms with a huge loss out of the fund. Funds with a greater risk profile do not always guarantee great profits; they only guarantee great expectations of probable profits. If you are an investor who is averse to risk, then be prepared to invest in funds that do not always secure high profits for you, yet, can serve as a steady source of income. Mutual funds are the best option for investors to plan their investments in a systematic manner, in sync with one’s risk appetite. Not complying with this simple information may land you into a financial mess where you might burden your pocket by availing a personal loan or a home loan at high interest rates. The purpose of your investments; to secure a financial future without the need for debt; is vanished. Carefully make way to sound decision making which can be profitable to you in the coming days. These funds usually invest in three categories namely, equity, debt and hybrid. In order to make a decision on any one types of mutual funds, let us broadly understand their nature and characteristics.
Equity funds make investments mainly in individual companies, by purchasing their shares through the mode of the secondary market. They also make purchases through IPOs or the Initial Public Offerings. It is also important to note that the net asset values of these funds are directly proportionate to a change in the price of equity shares. Equity shares are considered to be quite a risky option as they can be affected by several factors of the market. They mainly involve systematic, i.e., market risks that are inherent to the nature of the equity shares and that cannot be eliminated, and unsystematic risks, i.e., internal risks or risks that are mainly company-specific. Equity mutual funds, however, seek to get rid of internal risks by way of diversification of investments across several stocks.
The main types of equity funds are:
Dividend Yield Funds
They are mutual funds that provide steady income and capital appreciation to an investor, by making investments in stocks with high dividend yields.
Equity Diversified Funds
They invest large chunks of their corpus in equity shares that have been spread out across an array of sectors in the market.
Sectoral Funds
They make investments in organizations belonging to one particular sector. Thus, they are risky as they do not inculcate the golden principle of diversification while making investments.
ELSS or Equity-linked Saving Schemes
Although they are similar to equity diversified funds in terms of their nature of investment, this option of investment offers tax benefits to the investor.
Equity Index Funds
They invest particularly in shares that track a specific market index. However, they are highly exposed to systematic and market risks.
Small and mid-cap Funds
As the name suggests, mid-cap funds invest in medium sized companies and small-cap funds invest in small companies. The size of the firm is decided on the basis of the size of its market capitalization. However, it is important to remember that these risks do not possess much of the element of liquidity.
Contra Funds
They initially make investments in stocks that are undervalued, but possess the potential to outgrow their benchmark in the long run. These funds are best suited for investors who are willing to make an investment for a long period of time.