Mutual funds are becoming one of India’s favourite investment options with Average Assets Under Management (AAUM) of Rs. 38,21,816 crore as of October 2021. Even when mutual funds are this popular, there still exists confusion relating to how mutual funds invest your money. A lot of people are still under the impression that 100% of your mutual fund investment goes to stocks. Through this article, let’s demystify this and understand how mutual fund investments work.
Mutual fund portfolio
Every mutual fund plans will have a portfolio. This portfolio will contain a list of all the securities that this specific fund invests in. This is subject to change according to the economic conditions as the mutual fund manager, who pools and manages this money, tries to get the best out of your investments all the time. It is ideal to thoroughly check the mutual fund portfolio before you invest so that you have a clear idea of where your money goes. Based on which securities the mutual fund invests in, your expected returns, the risks associated, and the ideal investment horizon will also differ.
Do mutual funds invest in any other securities than stocks?
Yes. This is dependent on the mutual fund you have chosen but most of the funds are diversified. That means your money goes towards investing in many securities other than stocks such as government and corporate bonds, debt, commodities, etc. Where your money goes will depend on the theme and type of the fund. Let’s examine three types of mutual funds according to their portfolio characteristics.
- Equity-oriented mutual funds
As the name suggests, this mutual fund primarily invests your money in equities or stocks of different companies. In an equity fund, the performance of the fund is largely dependent on how these stocks perform. These mutual funds have at least 65% of the funds allocated to equity and equity-linked investments. As equities are considered the most volatile security, an equity mutual fund investment will have the same characteristics.
- Debt-oriented mutual funds
Debt funds invest your money in different debt instruments such as government and corporate bonds, corporate debt securities, money market instruments, etc. These debt securities give a fixed income, and they tend to give lower, yet steady growth compared to an equity mutual fund. The stocks component in a debt fund’s portfolio could be even lesser than 10% on occasions and thus, it is ideal for people who are averse to the risk associated with the stock market.
- Balanced advantage funds
Due to the recent market conditions, balanced advantage funds have a newfound love among investors of mutual funds in India. Balanced funds have a dynamic portfolio, and they invest in debts and equities according to market conditions to get the best out of your investment and at the same time, safeguard your money from the bears.
For instance, if the market is bullish, the fund manager will adapt the portfolio to include more stocks elements to increase the growth aspect. At the same time, if the market is bearish, debt instruments will have more space in the portfolio.
How to choose a mutual fund type?
There are plenty of options in terms of the portfolio in mutual funds schemes. Choosing one among them is a matter of your financial goals, investment horizon, and risk appetite. You can use the resources available on broker websites and buy MF online in a matter of minutes. Happy investing!