Explained: Different types of mutual funds and how to choose one

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Mutual fund is an investment instrument, that pools money from the investors and invests in stocks, bonds, securities and other money market instruments. These funds are professionally managed by money managers and individual investors are allotted units based on the amount they invest and optimise the return. The profit earned by an investor is proportional to the amount invested. To put it in perspective, Sunil Subramaniam, MD and CEO of Sundaram Mutual Fund explains that — if you earn a profit of Rs 50 by investing Rs 500 in Fund A, those investing Rs 1,000 will earn a profit of Rs 100.

Types of mutual funds Broadly, mutual funds can be classified into two categories – equity and debt – based on their asset allocation. Equity funds invest in stock market / equities while debt funds invest in debt money market and fixed income instruments. According to Subramaniam, a safe portfolio should consist of both equity and debt funds as it will keep your portfolio diversified and balanced. In debt mutual funds, the risk and the returns are lower, while in equity funds, the risk and the returns are higher. Hybrid mutual funds, as the name suggests, are a combination of both equity and little debt. They are suitable for new investors. Balanced Funds, Balanced Advantage Funds, Aggressive Hybrids – all of them fall under the Hybrid funds.

How to choose a fund for yourself? Investors should decide the type of fund they want to invest in as per their risk appetite. Subramaniam explains that there are three types of investors: conservative—who do not want to take any risk at all; moderate—who are careful and can take small amounts of risk; and aggressive who can take higher risk. Aggressive and Moderate Investors can hold a higher share of the equity. Hybrid Mutual Fund is a good option for conservative investors.

Consider Systematic Investment Plans (SIP) With SIPs, you can invest in MFs in small amounts. Investors can start by investing as low as Rs 100 or Rs 500 every month. It also keeps you safe from market volatility. There is a benefit of cost averaging as well. You earn profit when the market goes up and you are able to buy more units when the market falls. One should not change the investment strategy according to the mood of the market, Subramaniam explains. Invest according to your goals.