Understanding Mutual Funds

When considering investments, people often are skeptical about mutual funds simply because they feel it is complicated to understand and manage. Keeping aside the jargon when simply put, it is a pool of funds put together by likeminded investors.  And whatever the sum of their contributions is managed by professional fund managers, who keep up with the markets and use their skills to invest in various financial instruments.

Now these investors have a common financial goal and basis that their funds are then put into a scheme that matches these objectives. These funds are generally well diversified, invested in varied stocks, bonds, short term money market instruments and commodities. This way mutual fund investments offer an attractive way of savings, which are managed quite passively, without asking for much attention and that too by experts who manage money every day.

When choosing types of funds, an investor must first be clear on the sum of investment, term of investment and risk taking ability. For this it is necessary that you know about the different options available. So the basic three categories of mutual funds are:

1.       Debt funds

2.       Equity

3.       Liquid/ Hybrid Funds

Debt funds, as the name suggests works on borrowings. It is on these funds that most of the companies, state and even central governments work. They do so by offering several debt instruments like Tbills, debentures etc. Debt fund gives assurance of principal investment being returned after the tenure and the interest too is calculated on a given rate of interest. It is these debt funds that bring stability to investment portfolio because the risk involved is lower to that of Equity Funds.