There are different types of mutual funds available in market, that helps you diversify your portfolio in different asset classes.
You should invest in mutual funds based on your age, risk appetite, future goals and requirements.
When you are young, you have invest for a longer period and hence equity based mutual funds are a better choice. But when you need to spend on house/car/higher education/child education/children marriage in some years from now, you will have to keep your savings spare in some less riskier investments.
Following are some of the classifications of mutual funds:
1. Liquid Mutual funds: Substitute of savings bank account. Will generate better returns than savings account. No entry or exit load. Money can be invested even for a day. Best for less than 3 months investments. Amount can be withdrawn anytime, there is no lock-in.
2. Fixed maturity plans (FMP): Substitute for bank fixed deposits. Better taxation than FD. Amount gets locked in for period of investment. Duration ranges from 3 months to 3 years.
3. Monthly Income plans (MIP): Mixed of Debt based investments with some equity portion. Good for people who need regular incomes ideally after retirement.
4. Diversified Equity mutual funds (Large cap, Multi cap, Mid cap and small cap): Pure equity based investment. They invest into stock market. Riskier than all other investments but can generate good returns for a longer period (>3 years). Large cap is less riskier than mid and small caps. Small cap is riskiest.
5. Sectoral mutual funds (Banking, Power, Infrastructure): They only invest into stocks of a particular sector. Like a banking mutual fund will only invest into bank stocks. They are riskier than diversified mutual funds.
6. Balanced mutual funds: They invest into a mix of equity and debt instruments. Around 60-70% is invested into equities and rest in debt/short term funds.
7. Exchange traded funds (ETF) (Sensex, Nifty, Nasdaq, Gold etc.): These are best form of investment as fund management charges are lowest. They can be traded like stocks on stock market. If you don't have time to track stock market, but want to directly invest in best stocks, these are the best bets. Nifty ETF invests into top 50 stocks (which make NIFTY index), similarly NASDAQ ETF invests into US Tech companies which makes NASDAQ index.
Let us know your further queries. For each such query, you can create separate question on this website. It will also help others with similar questions.
