A mutual fund is an investment fund where the many investors pool their money for the purpose of investing in securities including stocks, bonds, money market instruments and other assets.
Since the money is pooled up, it is called a mutual fund. These investors may be retail or institutional in nature. There are various kinds of mutual funds that one can invest in for long-term benefits. Today, we will talk about the five best mutual funds that may be beneficial for the investors.
1) Money market funds
The money market funds are comprised of safe short-term debt instruments that generally include Treasury bills. This is a safe place where the investor can put in their money. The people won’t get considerable returns, but they won’t have to worry about losing their principal.
The return is a little more than the amount one would get in a regular checking or savings account and a little less than the average certificate of deposit (CD). Basically, these are a safer investment, but with a lower potential return than other types of mutual funds. But with a less amount of risk, the return amount is quite worthy.
2) Fixed income funds
These funds basically provide present income at a steady pace. These funds pay a fixed rate of return including government bonds, investment-grade corporate bonds and high-yield corporate bonds.
The main aim is to have money coming into the fund on a regular basis, mostly through interest that the fund earns. High-yield bond funds are generally riskier than funds that hold government and investment-grade bonds. The target audience of this mutual fund includes conservative investors and retirees. This is because these funds offer a regular income. However, it may not be beneficial for the tax-conscious investors.
3) Equity Funds
These are the type of funds that invest in stocks and aim to grow at a faster pace than money market or fixed income funds. Therefore, there is usually a higher risk that you could lose money. The main objective of this type of funds is long-term capital growth. There are many different types of equity funds because there are many different types of equities.
The investor can choose from different types of equity funds including those that specialize in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.
3) Balanced funds
These types of funds invest in a mix of equities and fixed income securities. They try to bring a balance in the aim to achieve increased returns with the risk of losing money.
Most of these funds follow a criterion to split the money among the different types of investments. They are riskier than fixed income funds, but less risky than pure equity funds. The objective of these funds is to provide a collection of safety, income and capital appreciation.
The strategy of balanced funds is to invest in a portfolio of both fixed income and equities. A perfect balanced fund will have a weightage of 60% equity and 40% fixed income.
5) Bond Funds
Bond funds are those funds that invest and actively trade in various types of bonds. These are actively managed and tend to buy relatively undervalued bonds to sell them at a profit. These mutual funds generally pay higher returns than certificates of deposit and money market investments, but bond funds are quite risky.
They are risky because there are many different types of bonds and bond funds can vary on the basis of where they invest. For instance, a fund in high-yield junk bonds is much riskier than a fund that invests in government securities. And almost all bond funds are subject to interest rate risk, and this means that if rates go up the value of the fund go down.
Benefits or Advantages of Mutual Funds:
1) The mutual funds are professionally managed by specialized fund managers.
2) Mutual funds are easy to buy and sell. These are widely available through banks, financial planning firms, investment firms, credit unions and trust companies.
3) Mutual funds are of various types that can be used to meet a variety of financial objectives.
4) The major benefit of mutual funds is that they give a good amount of return and you can make more money out of investing in them.
5) Mutual fund schemes also offer the people tax benefits under the Section 80C of Income Tax Act.