Mutual funds is one of the most preferred choice of investment options for several investors around the world since it offers valuable returns. However, to get maximum returns, you need to invest in the right type of mutual funds based on your risk taking capacity. In this write-up, we list down the popular types.
Whilst several people invest in mutual funds, not many people know the different types of funds and how these funds work. If you are looking to invest in debt funds, you must know the following types:
Gilt Fund are a kind of mutual fund investment that essentially invests in government securities with different maturity terms. Typically, an average government maturity bonds have a maturing period of 15 to 30 years. One of best advantages of investing in this type of debut mutual funds apart from locking in your funds for a fixed tenure is that expert fund managers manage these funds which also take calls as per the variation in the interest rates. Whilst, Gilt Fund offer attractive returns, you must know that it also involves high risk since the interest rates of these funds are highly volatile. All newbies and investors with low-risk intolerance must avoid investing in Gilt Fund.
Short Term Debt Funds
The short-term debt funds invest in several avenues like certificate of deposits (CD), commercial papers (CP) and short maturity bonds. This type of investment is best suited for people who are looking for a short-term investment with quick returns and stable returns; the maturity of the short-term funds usually ranges from two to three years. Typically, the fund managers employ accrual strategy for these funds, the hold on to the funds till the maturity period.
Fixed maturity plans
This type of debt funds, as the name itself suggests are close ended schemes and come with a fixed lock-in period. The fund managers invest the funds in fixed income securities that have maturities to match the tenure of the scheme to mainly reduce the pre-investment risks. FMPs are considered to be one of the safest investment avenues since it offers stable income, and they are best suitable for investors with low-risk tolerance. The returns earned on fixed maturity plans are much higher than the interest rates given by bank fixed deposits.
Monthly Income Plans
The monthly income plans are essentially the debt oriented hybrid mutual funds, which invest about 75% to 80% of the portfolio in the fixed income securities and 20 to 25% in equities. The equity portion of the portfolio provides a boost to the monthly income plans, which usually offers stable returns. This type of funds generates high amount of returns from pure debt funds. However, you must be aware that here the risk involved is again higher as compare to other debut fund categories.
Liquid fund invests mostly in the money market instruments like the certificate of deposits, commercial papers, term deposits and treasury bills with the intent of providing the investors to earn valuable returns. The fund managers usually invest in the market securities that have a residual maturity of 91 days or less. This type of investment is suited for people looking to grow their money since it offers significantly higher returns than savings bank deposits also unlike the bank interest, liquid funds have tax exemptions. Another significant advantage of this type of debt fund is that there is no exit load, you can withdraw from the fund any time you want and your withdrawal will be initiated within the next 24 hours. This type of investment is best suited for people who have surplus cash; you can earn better returns than putting it in your bank.