Understanding the different types of mutual funds

A sound financial plan is not the one which does well in good times, but the one which is the least affected by the complex market conditions. Diversification and asset allocation are the two most important aspects of investment planning. As different assets perform differently time frames and market conditions, asset allocation is one of the best ways to ensure that you reduce the risk associated with your investment portfolio through diversification across various asset classes. The percentage of investment in various asset classes will depend on your individual goals, risk appetite and time horizon for investment.

Mutual funds are one of the most preferred investment options for investment for investors wanting to invest in equity as they offer diversification and thus reduce the risk associated with a single security. But it is a myth that mutual funds only invest in equity. You can also invest in gold, debt and real estate through mutual funds. Let us look at the various types of mutual funds and how one can take advantage of this:

Equity Mutual Funds:  Though equity is a risky asset class, but in the long run, this asset class has given huge returns. Investment in equity funds should be made keeping in mind a minimum investment period of seven to ten years. A higher percentage of equity in the portfolio is ideal if you do not have any liability in the short or medium term and have the willingness and ability to take the risk associated with the equity market.

Debt Mutual Funds:  A common practice amongst investors is that they tend to invest their surplus funds in equities but when it comes to investing in safe havens they still resort to Bank FDs. This is one of the main reasons that debt mutual funds are not so popular in India. However, banks are currently sitting on a huge surplus of cash, mostly all banks have already lowered the interest rates and are likely to do it again in future, making the returns generated on FDs negligible. By investing in debt funds an investor can invest in such fixed income securities and earn stable returns even in the low interest rate regime, as the bond prices tend to go up and give the opportunity for huge capital appreciation. One can safely look at investing in debt funds without having to take the risk of equity funds and enjoy the safety of traditional debt instruments at higher returns.

Gold Mutual Funds: Gold has been one of the most favored asset classes amongst Indians not just for investment but also for the ornamental value. As an asset class, gold is extremely volatile. However, in times of uncertainty, it is considered an excellent hedge against inflation. Whenever there is volatility in the equity market, people often resort to investing in gold or debt funds. Investing in physical gold carries an inherent risk of safety and storage and now that the government has restricted cash purchases of physical gold, one is better off investing their money in gold through mutual funds to diversify their portfolio without any physical custody of the same.

Real Estate Mutual Funds

The real estate market is considered to be the biggest storehouse of unaccounted money in India. Post demonetisation there is a slowdown in the secondary market in residential space, the commercial properties are largely unaffected and lower interest rates are likely to prove beneficial for this sector in the long run.  To invest the huge amount in real estate directly is not possible for everyone, but after the recent announcement by SEBI, allowing mutual funds to invest in REIT funds you can diversify your mutual fund portfolio in real estate. REITs are funds which invest the corpus collected in income generating real estate. One can enjoy the returns generated by high yielding real estate properties without having to invest a huge corpus in the same.

One should look at investing your hard-earned accountable money through organized investment channels and mutual funds are by far the best investment option available to investors who do not want to invest in asset classes directly as they come under the strict regulation of SEBI and offer professional management of funds at a very nominal fee.