Tuesday, May 24, 2022

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    What are mutual funds?

    There are many popular ways to invest your money such as Savings Account, Fixed deposits, Gold, Real Estate, Stocks, Bonds, and Mutual Funds.

    Investment in mutual funds is really easy!

    Mutual Funds is a special kind of investment through which you can invest in different types together. Asset Management Company (AMC) starts mutual funds. Basically, you give your money to AMC as other people do. AMC then invests all the money collectively at different places. AMC has appointed experts and professionals and with their suggestion, they invest the pooled money at different places and the return rate they get collectively from these different places. Out of that, some small percent is kept by AMC and the rest is returned to you as per the return rate.

    To invest in a mutual fund, you need not have a large amount of money, you can go with SIP and invest a small amount every month.
    There are many companies and banks such as HDFC, Reliance, TATA, ICICI, HSBC, and many more that have started their own asset management company. Every AMC starts different kinds of mutual funds in large numbers.
    So, now if you think about how risky is your mutual fund and what is the rate of return, then the answer is that it depends on the mutual fund you are investing in. It depends on where the AMC is investing your money. If they are investing in stocks then it will be riskier but will give you a high return whereas if they are investing in bonds then the risk is less along with the returns.
    Mutual funds are of 3 types mainly:
    Equity: In this, your money is invested in stocks. Therefore, it is riskier but will yield a higher return.
    Debt: In this, your money is invested in the debt instruments. Debt instruments are bonds, debenture, etc.
    Hybrid: This is a mixture of equity and debt funds. When most of your money is invested in a debt fund then it will be called Balanced Saving Fund. The ratio is generally 70:30 which means 70% of your money is invested in debt instruments whereas 30% is invested in equity. When this is the other way, it is called Balanced Advantage Fund.
    The main advantage of investing in a mutual fund is that they are already diversified and due to this you bear less risk because you are not investing your money in one place and if at all anyone thing crashes, then your money won’t be affected.

    Hence, in comparison to the stock market, gold, real estate, mutual funds are less risky, however, the exact risk depends on the mutual fund that you are investing in.

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