Whether you have just started looking for various mutual fund investment options or want to make your portfolio more diverse, you need to know how your money can work for you even when you are focusing on other things.
According to a study done by Prime Database, India has more than 5 crore investors who are verified and linked with their PAN card. Most people start their investment journey in their early 20s because being late in this journey slows their chances of getting financial independence.
In this guide, we will explain to you the 7 types of best mutual funds in India that you must know about as an investor.
Key Takeaway
- There are various types of mutual funds that come with different risk levels.
- You can choose the mutual fund option after understanding whether you want to invest for the short term or long term and whether you want to take big or small risks with money.
- When you invest your money in risky funds, you can either see a huge gain or a huge loss. But when you invest in low-risk options, you can neither see much gain nor much loss, as they don’t move up or down quickly.
Types Of Best Mutual Funds in India Every Investor Should Know
Before starting your investment journey in India, you must know about the best mutual funds in India that you can explore for investing money. Here are the 7 most popular types of mutual funds you should know about:
1. Equity Funds
Equity funds are a perfect option for mutual fund investment if you are able to take big risks and store your money for the long term (more than 5 years). If you are looking to create significant wealth, then you should choose equity funds. Most people are able to increase their money and live happily after retirement.
You will mostly invest your money in stocks when you choose equity funds. These funds are divided into various categories, like small-cap, mid-cap, and large-cap. These categorizations are based on the market capitalization of the companies you are investing in.
2. Debt Funds
In mutual fund schemes, you can find debt funds, which allow you to invest your money in fixed-income securities like treasury bills, government securities, corporate bonds, and money market instruments. When you choose to invest in a debt fund, you are providing your money to the government or corporate entities for lending purposes. Hence, you will earn interest and even have the potential to get capital gains in the future.
These funds are best for those people who want to invest their money for stable returns, as there is way less risk of losing money compared to equity funds. There are different investment durations in debt funds, like you can choose to invest for short-term, medium-term, or long-term.
3. Hybrid Funds
In mutual fund schemes, you can find the option to invest in hybrid funds, which allows you to invest in a mix of asset classes. Hence, when you choose hybrid funds, you are able to invest in both stocks and bonds (equity and debt funds) within a single portfolio.
The investors who choose hybrid funds are able to enjoy putting their money in the best options available in both equity and debt funds. They can take risks and increase growth potential by investing in equity funds. At the same time, they can see stable returns by investing in fixed-income instruments.
4. Index Funds
Index funds can be either mutual funds or ETFs, and you can choose to invest in both. They are able to replicate the performance of a particular market, like Nifty 50 or Sensex. Compared to active funds, investors in index funds use a passive investment strategy. In this type of investment option, individual stocks won’t be picked by a fund manager. They will simply hold the same securities in the same quantities as the index.
When you choose to invest in the same stocks as the index, your funds get good exposure to the broad market, and you have to pay fewer management fees. Hence, index funds are perfect for you if you want to invest at minimal costs using a passive investment strategy.
5. Sectoral Funds
In equity mutual funds, you can find sectoral funds that allow you to invest money in particular sectors of the economy, like banking, technology, healthcare, or infrastructure. In diversified funds, the funds are spread across different sectors, which reduces the risk, as it doesn’t depend on one part of the economy. But when you invest your money in sectoral funds, your profit or loss depends on the success of a single industry.
Hence, you can understand that investing in sector funds can be extremely beneficial when you are investing in the right one. But there is a high risk, especially when the sectors see major fluctuations. These funds are perfect for those investors who are able to handle risk and are knowledgeable about particular industries.
6. Liquid Funds
In a debt mutual fund, there are liquid funds for investors that allow them to put money in very short-term market instruments, like commercial paper, treasury bills, and certificates of deposit. These options come with a maturity of up to 91 days. These funds act as an alternative to traditional savings accounts.
Investors who choose liquid funds get better returns compared to a savings account. These funds are less risky and best for investors who need quick access to their money and want to invest for a short time.
7. ELSS Funds
ELSS funds are tax-saving equity mutual funds that allow investors to put a major part of their money into equity or equity-related instruments. These schemes are popularly called ‘tax-saving funds’ because they provide tax exemption in India of up to INR 150,000 from the person’s income that is annually taxable. This rule is mentioned in the law under Section 80C of the Income Tax Act.
Choose The Right Mutual Fund Option After Getting Proper Training
Since there are multiple types of mutual funds and the number of companies that you can invest in are different, you should understand the market as well as the process before jumping in with your money. Hence, you should get proper training for trading money in mutual funds. So, we will suggest you invest some time in searching for the best training centres for trading in Hyderabad.
