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Mutual fund is a good way of investment that has less risk associated with it and gives better return than the banks. Mutual funds are basically a collection of stocks and bonds and other forms of financial instruments. You can invest in the fund by buying the units of the funds and that corresponds to your share in that fund. You can make profit from mutual fund in many ways. When dividends are earned by the fund from the holding stocks, this dividend is passed to the investors, when the stocks appreciates in the market and they are sold by the fund you get the portion of the profit and of course if the appreciated stocks are not sold then the NAV or the net asset value of the mutual fund increases.
How to invest in the mutual funds?
There are so many mutual funds that are maintained by banks and financial companies. You can fill up the form and pay for the number of units that you want to buy to invest in the mutual fund. If you have an online stock trading account you can of course invest in the mutual fund through that account as well. The process of investing in mutual fund is simple in comparison to stock market investment. But writing cheques and filling up the form is not enough. To invest in the mutual funds you have to first decide which fund is good for you to invest in. There are so many factors that you need to consider before choosing a mutual fund for investing but before that you need to have a comprehensive idea of different types of mutual funds that are available in the market.
Types of mutual funds
There are primarily four types of mutual funds that are available in the market.
Equity Funds – These are the funds that primarily invest in the equity market or the stock market. There are three different categories of equity funds – the growth funds, value funds and of course specialty funds. In growth funds investments are made to the stocks of the fast growing companies. These funds give maximum return in a short period of time. In value funds investment are made to financially strong and blue chip companies. The appreciation in these funds is slow but steady. In the specialty funds investment is made to the stocks of specific sectors. Among all three different types of mutual funds equity funds have more risk associated with it but then it can give you the best returns as well.
Fixed income funds – As the name suggests these mutual funds provide a steady income to the investors. These funds primarily invest in the government bonds and securities. Though the fixed income bonds give better return than the certificate of deposits it do have risk factors. Comparatively the funds that invest in government bonds are less risky than the funds that invest in the high yielding bonds. Moreover, all the fixed income funds are dependent on the interest rate risk. If the interest rate in the market increases the value of the fund will decrease automatically.
Money market funds – These are the safest of all the mutual funds. These funds invest the money to the short-term debt instruments that are available at money market. Though the money market funds won’t offer you great returns like the equity funds but then you can be rest assured that you will lose your principle when you have invested in these funds.
Index Funds – The index traded funds are the latest addition to the mutual fund market. These are the funds that invest primarily on the indexes of the stock market. Though these funds are directly related to the stock market like the equity funds, investors have to pay less fees and charges for investing in the index funds.
Choosing the right mutual fund – Depending on your objective, your risk tolerance and time frame for which you are investing in the mutual fund you have to decide on the type of mutual fund that would be better for you. If you are investing for a longer period you can take more risk while investing in the mutual fund. Once you have decided on the type you can then compare the past performance of the funds in that category to select the mutual fund for investment.
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