It is known that the stock market is subject to a lot many risks. The BSE and NSE share market trading requires constant monitoring of the market prices and analysis of the same. While there are many investors who can dedicate a large chunk of their time to keep an eagle eye on the fluctuating market, there are several who can’t dedicate that amount to time to stock trading, or wouldn’t want taking big risks. At times a person might not be attracted to stocks and the returns it offers for their own reasons. In the light of such situations, you have the option to diversify your portfolio and invest in other avenues. One such investment is known as Mutual Funds, which shall be discussed in this article.
What are Mutual Funds?
There are companies that accumulate money from investors to purchase stocks in other companies, bonds, debts and other short term securities. Such pooled resources to create a portfolio are known as a “Mutual Fund”. By investing in a mutual fund company, investors buy their share in the company’s portfolio. Each such mutual funds investor is entitled to returns from the owned shares.
Benefits of Buying Mutual Funds
- Diversification of Portfolio: It is a good investing habit to never throw all your eggs in one basket. Diversification leaves a lot of room to spread out risks and lessens the impact of loss for a trader.
- Liquidity: Mutual funds are redeemable on demand, for the Net Asset Value along with any redemption fees.
- Affordable:Mutual funds are affordable to invest in when compared to other securities on the initial and subsequent purchases.
- Professionally Researched: The investors have little to worry about since the mutual funds are professionally managed. The research work is done by fund managers on the selection of securities and investment.
Risk In Owning Mutual Funds
The risk involved in owning mutual funds is that you may lose some or all of your money when it comes to stock market fluctuations. If the stocks and securities purchased by the mutual company are not doing well in the market, the value of your mutual funds slopes downwards as well. You may also notice the impact on the value of dividend and interest in case of changes in the market.
Types of Mutual funds In The Market
The following types of mutual funds are segregated on the basis of asset class:
- Money Market Funds: Money market funds often invest in liquid instruments such as bills, CP etc. They are apt for people looking to invest surplus cash to gain moderate returns immediately. The risks involved are with respect to credit, reinvestment and returns.
- Debt Funds: Debt funds invest in debt instruments such as debentures, government bonds and other types of fixed income assets. The risks here are very low and the returns are fixed. There are no TDS charges here, so an investor is liable to pay them himself if the investment is higher than Rupees 10,000.
- Equity Funds: This is a type of high-risk class of mutual funds. The equity funds are those invested in the equity stocks of other companies. Since it is directly affected by the volatile stock market, a sizable risk is to be assumed. These stocks contain fast moving goods, infrastructure and other specialty
- Balanced or Hybrid Funds: This class of funds balances out the risk-return equation. They contain a mix of assets, some of which have a higher portion of debt than equity. In some cases, it is the other way around.
There’s is always scope for an investor to improve his trading skills by making calculated decisions about how to invest in the trading market. Another important lesson being diversification teaches investors that it is always good to know more about other investment options to dive into. Good investors are well versed with as many trading aspects they can learn about. Reading about such articles makes things easier, especially if it is a one stop place such as IndiraTrade, where we dedicate each and every article towards providing more help to our readers.
For example, you can read more about “How Diversification Can Protect Your Portfolio” to know why trading gurus stress on making a diverse portfolio. Happy trading!