5 Types of Mutual Funds Every Investor Should Know

Many investors prefer mutual funds as the best form of investment. Mutual fund investments provide an opportunity to diversify and make their portfolios less risky. This article provides information about the five broad categories of mutual funds. Knowledge of these can enhance the capability to make the best investment decisions and receive significant gains.

1. Equity Mutual Funds

Equity mutual funds mainly deal with the shares since they invest in the stock market. They have higher growth rates for long-term investment. Equity mutual funds are suitable for investors with high-risk tolerance since these funds are inherently risky. Equity funds come in various sub-categories, ranging from large-cap to multi-cap funds. The higher the expected returns, the higher the risks involved in this investment option.

2. Debt Mutual Funds

Debt mutual funds mainly deal with fixed-income instruments, although they also invest in equities to a lesser extent. Debt mutual funds are comparatively less risky than equity funds. Debt funds are a better investment tool for investors who have risk tolerance and seek slightly higher returns. They provide relatively low but predictable income. Depending on the risk-taking capacity, several kinds of debt funds can exist. For instance, short-term debt funds have less risk than long-term debt funds.

3. Balanced or Hybrid Mutual Funds

Balanced mutual funds are also called hybrid or mixed mutual funds, where the funds get invested in equity and fixed-income securities. A hybrid mutual fund invests half of its corpus into shares and the rest in securities. Balanced mutual funds provide both growth opportunities and steady income. They have moderate risk levels while targeting high returns. They are suitable for investors who have a medium-risk tolerance level. 

4. Index Mutual Funds

Index mutual funds mimic the performance of a particular index, like the Nifty 50 or BSE Sensex. These funds are among the cheapest among the actively managed mutual funds. It is suitable for those who wish to make long-term passive investments in the stock market by purchasing index funds. Index mutual funds are best suited for investors with long-term goals while targeting high returns.

5. Liquid Mutual Funds

Liquid mutual funds mainly invest in short-term money market instruments. They offer high market liquidity and a relatively low level of risk. Liquid mutual funds are ideal for holding excess money for short-term market transactions. It gives you higher yields than a standard savings account. These funds are well suited for satisfying short-term goals and needs.

Conclusion

When choosing mutual funds, there are different options to consider. One has to compare multiple categories of financial instruments before investing. Several applications, like the Axis Mutual Fund, IIFL, 5paisa, etc., can help investors compare the various financial instruments. Different mutual funds offer variable purposes, and therefore, they have varying risk levels. Knowledge of various mutual funds, their advantage and risk capacity is crucial for investors to make better investments and earn significantly. For instance, equity mutual funds offer higher returns, while debt funds are safer. The balanced fund provides a balance of growth and income returns. Diversifying your investments into different financial instruments can help the investor to have a balanced and stable investment portfolio.