But what exactly is a mutual fund?

Mutual funds are a pool of investments made by several individual investors, companies, and other organizations with a relatively common investment objective. These are managed by professional fund managers with adequate wealth management expertise.

Based on their analysis and research, the fund managers decide how to allocate the fund across securities, be it equity, derivatives, fixed income, or commodities, and determine when it’s time to sell.

Here’s a guide to help you understand the basics of investing in mutual funds:

Types of mutual funds

Mutual funds can be broadly classified into three types, depending on the underlying asset class.

Equity Mutual Funds

A mutual fund scheme is classified as an Equity mutual fund if it invests at least 65% of a mutual fund in the equities and equity-related instruments.

They can give potentially higher returns but come with higher risk as they are subject to market fluctuations.

Debt Mutual Funds

They are predominantly invested in debt and fixed income securities such as corporate bonds, government securities, Treasury bills, commercial paper, and many other money market instruments.

They return a low fixed rate of interest but are not subject to market fluctuations.

Hybrid or Balanced funds

They are a combination of both debt and equity funds. By diversifying the portfolio, these funds balance the risk-return ratio.

Things to consider before investing in mutual funds

• Assess your financial goals

Be clear on your financial goals, budget, and time horizon before investing. It will help decide the amount to be set aside for investments of different tenures (long term or short term).

• Choose the right type of fund

With a vast number of mutual fund schemes in each category, you should compare and choose the one that remains consistent with market volatility and deliver decent returns.

Make the right choice of funds by analyzing the risk involved. Until and unless you have an appetite for high risk, experts recommend beginners choose safer options like debt or balanced mutual fund with minimal risk.

Read more on how to choose the right mutual fund here

• Diversify your portfolio

Diversify your portfolio by investing in fixed deposits, gold, debt, or other money market instruments, apart from investing in mutual funds.

• Go for SIP instead of lumpsum investments

Investing through systematic investment plans (SIP) is viable for first-time investors. You can start small with monthly investments of as small as INR 500. You can link your bank account so that the amount is automatically deducted.

Additionally, make sure to activate internet banking on your bank account before you invest in mutual funds. Investments can be made through debit cards or cheques. But doing via net banking is convenient and secure for investing.

• Seek professional advice

It might be beneficial to seek expert opinions from financial advisors before investing in mutual funds for the first time.

Paison ki Seedhi Baat

Investing in mutual funds can protect your returns from market risks to a large extent. Diversify your portfolio and get the best returns on your savings.

Download My Money App to manage your personal finances better and start saving to invest in mutual funds today.