Mar 1, 2023
Mutual funds are an excellent way to invest in the stock market. They provide decentralization. So, if you own a mutual fund and it's performing poorly, you won't lose as much money as if you owned individual stocks. Mutual funds also offer higher returns than individual stocks, so you can get more out of your investment. Mutual funds invest in various financial instruments such as stocks, government bonds, corporate bonds, bonds and gold, depending on the mandate of the scheme. Disciplined and systematic investment by mutual funds can work wonders if planned well. Broadly speaking, the two most common types of mutual funds are equity investment funds and debt investment funds.
Equity mutual funds aim to generate high returns by investing in stocks of companies of all market caps. Equity funds are the riskiest class of mutual funds and therefore have the potential to generate higher returns than bond and hybrid funds. A company's performance has a significant impact on its returns to investors. Asset allocations can only be made in large-cap, mid-cap, or small-cap stocks, depending on market conditions. The investment style can be value oriented or growth oriented. After a substantial portion has been allocated to the equities segment, the remaining amount may be allocated to fixed income and money market products. This is to accommodate sudden redemption demands and reduce the level of risk to some extent. Fund managers make buy and sell decisions to maximize returns by taking advantage of changing market movements.
Buying a debt security can be viewed as lending money to the issuer of the debt security. Debt funds invest in fixed income securities such as corporate bonds, government bonds, treasury bills, commercial paper, and other financial market instruments. The main reason to invest in debt funds is to get stable interest income and capital appreciation. The bond issuer pre-sets the rate and term it will receive. Therefore, they are also called "fixed income" securities.
Debt funds that invest in higher rated securities are less volatile than lower rated securities. In addition, this period also depends on the fund manager's investment strategy and the prevailing interest rate system in the economy. Falling interest rates encourage fund managers to invest in long-term securities. Conversely, when interest rates rise, he will be tempted to invest in short-term securities.
On the other hand, equity mutual funds have given higher returns over the years and have a greater potential of providing better returns than debt funds, but it depends on whether you invest in front-loaded debt funds or otherwise.
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