When we talk about investing, people have a confused look on their face or a wary look. Most potential investors have a broad understanding of this investment tool with little knowledge about the different kinds of Mutual Funds.
Let’s assume some time period to the goals for better understanding. Short term goals are those for 1 to 3 investing years. Medium-term goals are those for 4 to 6 years. Long term goals are those more than 7 years.
Mutual Funds For Short Term Goals
When the word short term comes, the first thing which comes to our mind is Fixed Deposit because it’s safe, secure, and offers steady returns but now we have a better option i.e. Debt funds.
Debt funds have been raging in the last couple of years. More and more people have been opting for debt funds over Fixed Deposits. It has been proven that debt funds offer better returns than Fixed Deposits and also one gets tax benefits.
If you invest in Debt funds for more than 3 years, the gains are added to your income and taxed as per your salary bracket. unlike with a Fixed Deposit, where the banks cut Tax Deducted at Source when the interest earned crosses Rs. 10,000, there is no Tax Deducted at Source deducted on interest earned in a short-term Debt Fund.
Your get indexation benefit which means gains are taxed only after factoring in the rate of inflation for the investment period only when your debt funds are more than 3 years.
The other type of fund is the Income Fund. They have a maturity period of five years and they respond to every change in the interest rate. When interest rates fall, the value of Income Funds rises and vice versa. The dropping of the interest rates this year has brought Income Funds to the spotlight, and with the RBI hinting at cutting the rates, this fund is gaining more power. Income Funds are subject to market risks from changes in the interest rates.
Short-term debt funds are not at all that subject to changes in the rate of interest. The return on your short-term Debt Fund is actually the interest earned on the bonds. Hence, the returns are not all that juicy and high, but they are steady.
Mutual Funds for Medium-Term Goal
Investing in medium-term goals means willing to take a risk and one way to take calculated risks is by investing in a Balanced Fund. When you choose to invest in a Balanced Fund, it means that your money is invested in equity and debt instruments together.
Equity is stock and stocks are riskier than any other instrument. Debt is not as risky as a stock that’s why a balanced fund invests in debts, it acts as a backup cushion. The combination of equity and debt largely increases your chance of reaping lucrative returns with only a fair amount of risk.
Equity-Oriented Balanced Fund
As the name suggests, the larger a larger chunk of your money is invested in equities (stocks). This enables you to get all the advantages of an Equity Fund. The returns you get on this fund are tax-free if your investment period is more than a year. But equity funds are risky. If good times comes you get good returns, if bad times come then you get losses.
Debt-Oriented Balanced Fund
As the name suggests, it contains a larger chunk of your money is invested in Debt Funds. This fund gives lower returns but gives at least a security than its above-mentioned counterpart. It does not offer all the tax benefits of an Equity-Oriented Balanced Fund. Earnings from these investments of less than three years are taxed as per your income slab.
Mutual Funds for Long term goals
When you look at Mutual Funds as a long-term investment option, you can invest money in large-cap, multi-cap, mid-cap, and small-cap funds. As the name suggests, the investment made is for a longer duration.
Large Cap funds
It means investing your money in large-cap companies. These companies have a strong track record and their price of stocks is relatively stable. They are mostly able to withstand stock-market fluctuations with a minimal swing in either direction. Since this fund is not very volatile, it offers security but lukewarm returns.
These funds are very vulnerable to market fluctuations, and so, is inherently a little risky bet. But the prize for taking this risk is excellent returns. If this fund swings up, you get high returns. But don’t take your eye off the risk.
Mid Cap and Multi-Cap funds
Investing in a Multi-Cap Fund will be a wiser decision if you have to choose between the two. When you choose this fund, your money is diversified. So, you have a balance between risk and returns. You get the stability of large-cap funds and returns of small-cap.