7 best types of funds to invest in 2020 for beginners

Do you know, As per data in the fiscal year(2019-20) these types of funds industry has added up 9.39 lakh accounts each month.

Now the question arises Why the investments in mutual funds are rising and it is the best investment option?

Because as per sources over the time it has given more than 10% returns annually.

But when are choosing the mutual funds as an investment than its very difficult to choose which type of fund is best for me as per my goal and risk appetite.

So today, In this blog we will discuss the working and types of mutual funds.

What’s inside for me.

1. What is this mutual fund investment?
2. The broad categorization of mutual funds.
3. Types of Funds based on market capitalization.
4. Types of funds based on Sebi’s recategorization.
5. Points to remember before choosing any type of mutual fund.
6. FAQ’S

What is this mutual fund investment?

A mutual fund is a type of investment in which money is pooled by the investors and this fund is used by the asset management companies in allocation to the different asset classes for attaining good returns as promised by them to their investors.

Know this best investment option more from this blog of understanding the mutual funds.

For instance -You have invested  ₹100 in a mutual fund as a result the company created a pool of 100 investors. who invested the same amount as  ₹100.

Now total pool created as  ₹10k(100*100= ₹10k). and it got invested by company as per the market conditions.

You can also go through our full mutual fund guide for better growth.

Mutual funds are broadly categorized into two types of funds listed below:-

When we start investing in mutual funds there are some types of it that are suitable according to the risk appetite of the investor.

Over the past years, many of these mutual fund companies are introducing new funds overnight and it’s confusing for the beginner retail investor.

Due to which the securities and exchange i.e Sebi(authority that protects the interests of investors in securities market) have recategorized these funds and divided it into five types and they are listed below:-

Open-ended mutual fund.

In an open-ended fund, the investor can withdraw or redeem their invested money at any point in time when he would require it, and also there is no maturity period.

Close-ended mutual fund.

Close-ended funds have a fixed period and after which the investor can redeem his money. These funds have a lockin period and a fixed maturity date.

For example,

If you are investing in ELSS schemes, Gold bonds, NPS etc. than these are categorized under close ended fund.

You can also go through this blog to know the best investment option for you as a beginner.

Now,all these funds have fixed tenure and can be redeemed at mentioned maturity date.

And if you are confused between the Sip or lumpsum type of investment than read our post.

Types of Funds based on market capitalization.

Large-cap types of funds.

These funds invest in companies with whose market capitalization more than Rs 20,000 crores.

Mid-cap mutual funds.

Funds of this type invest in companies with a market capitalization in between of Rs 5000-20,000 crores.

Small-cap mutual funds.

These types of makes investment in companies with a market capitalization below 5000 crores.

Types of funds based on Sebi’s recategorization.

Equity types of funds.

This is one of the largest categories of mutual funds and primarily invests in shares of the different companies.

Now, your investments in these funds will suffer to rise or fall according to the performance of the companies’ which are categorized under market capitalization. and makes a profit according to them.

And these funds have a high risk for a shorter period of time like 1-2 years or can go negative also.

But you need to have patience because it will give you high returns if invested for more than 8-10 years or even more.

So these types of funds are good for those who keep their eye from time to time on the market.

And also for a beginner with the help of a financial advisor or by his own learning experience as it gives good returns in the long term.

You can increase your funds more for investing if you should have the habit of saving money.

For example:-

This above-mentioned fund has 97% of investment in stocks and belongs to the multi-cap category.

And all the sources of examples given below are from the website moneycontrol so you can use it for research purposes.

Equity funds are further divided into below-mentioned categories:-

Sector funds/thematic funds.

These are the funds that invest in a particular sector like banking and finance, infrastructure, real estate, pharma, etc

Investing depends upon the market capitalization of the companies as large, mid, and small-cap industries as discussed above.

These funds are prone to more risk as they depend on only one sector and its rise and fall would bring profit and loss in the profile of the investor.

It does not provide diversification of funds as other funds provide.

For example -The below-mentioned funds belong to the pharma sector and invests majorly in the pharma sector and also prone to have high risk.

ELSS Schemes or Tax saving funds.

These are very much popular for those who want to trim down the taxes from their pocket and show these funds investment to the government to save taxes.

These schemes have a lock-in period of a minimum of three years and taxes are deducted under section 80C.

For example:-

Index funds.

These types of funds are getting popular in the past few years in those countries where the scope of growth is less and it is difficult to beat the market consistently.

so index funds buy the stock in a market index such as S&P 500, Nifty 50, etc.

As investing in these funds would require less research and analysis so the expense ratio of these funds are also less so investor enjoy more returns by investing in these type of mutual funds.

Also, these are called passively managed funds due to its less requirement to do the research in asset allocation which is an advantage over the actively managed funds.

Debt funds.

These types of funds ‘borrows’ money from the investors and keep their major proportions of their investment in fixed interest giving securities like corporate bonds, government securities, treasury bills, commercial paper, etc.

As debt funds invest in government securities so these are less volatile (sudden up and down in growth curve) as compared to equity

But overall returns still depend on fund managing company and in which you are investing money.

Also the chances of the bankruptcy of the company in which your mutual company is investing so you need to take care of it.

And also you should check the portfolio of mutual fund company before investing your money.

For example -Some of the bankrupted companies as per records in recent times are IL&FS got bankrupted and many investors lose money.

Example of Debt fund:-Nippon India Gilt Securities Plan etc.

Hybrid or balanced funds.

As the name itself suggest that it invests both in equity-types and debt types of mutual funds.

So it will give balanced and average returns over a long period of time.

The key objective of these types of funds is that they want to allocate their money to diversify the assets and want an overall constant return.

So if an investor wants to take the exposure of both of the above funds in the single fund can opt it.

Example of Hybrid fund:–Axis Equity Saver Plan, etc.

Solution-oriented funds.

These are the funds that are designed to achieve a particular goal of the individual according to their age like child education planning and his marriage planning, retirement planning, etc.

Most often these mutual funds have the basic lock-in period and also check the portfolio of these funds before investing in it.

Also, these mutual funds are safe because they are not linked with the stock market which results in consistent returns.

Examples of Solution-oriented funds:-Tata Retirement Savings Fund, ICICI Prudential Child Care Plan Gift Plan, etc.

Other types of mutual funds.

This category involves a mix of funds and you can opt it according to your need like For example:-

Money market funds.

Money market funds invest in safe money market instruments like debt fund such as government bonds, treasury bills etc.

So the investor who wants to play safe can park their money under this safe fund and enjoy consistently returns.

Gilt funds.

These funds invest only in government securities and are suitable for investors like want to less risk and play safe.

But some of the investors feel these funds are risk-free but care should be taken on the holdings of that funds as a company in which mutual fund company has invested can go bankrupt.

Liquid funds.

These types of mutual funds invest in government bonds, safe money market instruments with maturity up to 91 days.

But it does not mean that you can invest in it only for 91 days it means after this period asset management company will reallocate its money to some other asset.

Why do you need to invest in these mutual funds?

You need to invest in these mutual funds because it provides better returns than saving account as nearly about 7% and

Also, you can keep money in these funds as generally, it does not have any exit load but check the portfolio of the mutual fund that you are investing.

Also, you should know the terms related to mutual funds for better returns and understanding.

For example -You get a gain of Rs 10000 from any of your investments and want to keep the money for some time.

It may be due to reasons like not having time to see in which asset you reallocate this money, the market is down, etc.

So you can revert back your money without any exit load.

After how much time can I withdraw my money?

Generally, You can withdraw your money immediately.

And there are no deduction charges involved in these kinds of funds but check its portfolio before investing.

Points to remember before choosing any type of mutual fund:-

• Invest in any kind of these funds depending upon your goal and time horizon to invest in like your aim can be tax saving, funds for children education, retirement planning, vacation planning, etc.

• You should properly check the portfolio of that fund according to your risk appetite.
• Also, check whether it is giving enough returns so that it should match up with your goal and would give results under the time horizon you are predicting for your goal.

• If you are investing in the sector or tax-saving funds, you should read its high risk and lock in period with its exit load value so that after which it would not leans to any misconception regarding that fund.

Also you should know the criteria of selecting the fund for better returns.

FAQ’S