The COVID-19 pandemic forced young professionals to look at investment avenues for earning extra income. That’s because when stay-at-home orders became the norm in 2020, people learned the hard truth that the income from full-time employment is not enough. That’s when people started looking at investment options such as FDs or investment schemes that are known to allocate funds to the market. While schemes such as FDs are known for being a safe investment option. Market investments are known for coming with risks. But they are also known for fetching high returns for their investors. This is the reason people prefer signing up for investment plans that are known to direct their investments toward the market.
One of the schemes that are known for investing in the market is mutual fund plans. Mutual fund plans can be defined as an investment tool that is known for pooling money from a group of investors to purchase different securities. Once enough money is collected into the fund, it is invested in various financial securities like money market instruments, stocks, and gold. When you opt to buy a unit in a mutual fund, you end up owning a small stake in all the investments that are considered a part of the fund. As these schemes are known for coming with numerous benefits, mutual funds are considered a prudent investment choice.
How are mutual fund schemes known to work?
To opt for a mutual fund scheme, you firstly need to select an AMC i.e., an asset management company. There, you will need to select the right variant of mutual fund scheme that caters to your distinct investment needs. After selecting the scheme after learning the fund’s objective, the money from the pooled fund is invested into various securities such as gold, bonds, stocks,and other money market instruments. A professional called a fund manager is responsible for the upkeep of each fund. The fund manager aims to earn optimum returns on the fund’s investments. Afterwards, the revenue generated by the fund is divided and distributed among the investors proportionately.
Are there any actions that need to be taken to select the right mutual fund schemes?
Considering the fact different types of mutual funds are available as an investment options, it is understandable that a new investor might be confused. But there are certain actions that you can take. Listed below are some of the actions that you can take. They are:
- First, determine the investment objective:
This is an action that you need to take before you sign up for a mutual fund scheme. You need to ascertain the main reason behind your choice for investing in a mutual fund scheme. For example, you want to increase your savings in the future, and, to do so, you may opt to invest in mutual fund plans for ten or more years so.
- Research the market condition thoroughly:
Consider this hypothetical scenario. You are considering opting for an equity fund. But you just can’t blindly sign up for the said variant of mutual fund scheme because the equity market is extremely volatile. So, it is prudent on your part to thoroughly study the market conditions regularly.
- Look up the performance of a mutual fund scheme:
It is better to choose a mutual fund scheme that offers the best returns to the investors regularly. So, it is very important to check the consistency offered by the scheme. It can be done by looking up on the internet and apart from looking up past performance, it is also important to check the ranking of the scheme.
What are the different types of mutual funds that are available as investment options?
Here are some of the variants of mutual funds that are available as investment options:
- Equity funds:
Equity funds are a variant of mutual funds that are known for allocating funds mostly to the stocks of various companies. As the name suggests, these funds are known for investing primarily in equities to generate capital appreciation. However, it is important to make note of one important fact. It is, you need to steel yourself against investment risks.
- Debt funds:
Also referred to asfixed-income funds, debt funds are known forgenerally investing in assets such as government securities and corporate bonds. The main objective of debt mutual funds is to offer reasonable revenue to investors. These mutual funds can be considered an ideal investment optionif your financial goalis to acquire a steady income over time.
- Hybrid funds:
Hybrid funds are a type of mutual funds that are known for coming with both debt and equity components in a specific ratio. These schemes are known for helping you to diversify your investments by allocating your funds to different asset classes such as equity and debt.
What types of mutual fund schemes are suitable for beginners?
If you are new to the world of investment, you should have an open mind about opting for any type of mutual fund scheme. That’s because to get the best results, you need to select mutual funds based on things like your investment objective and time horizon.