Mutual funds have become a very popular and effective way for investors to take part in the financial markets in a simple, low cost manner, while muting risk characteristics by branching investments out into different securities, which is also called diversification, which is a main part of an individual’s investment plan.
A mutual fund is one pool of money that investors can put contributions that will be invested depending on the purpose of the scheme. Mutual funds offer potential for capital growth through investment performance, dividends, and distributions with the help and advice of a portfolio manager who makes investment decisions on behalf of the mutual fund plan holders.
Mutual funds have increasingly become the investment product of choice among investors, when it comes to long term investment. It is very important to properly study the performance of the mutual fund and understand what the play off is between risk and return to understand how a particular mutual fund scheme is performing. Risk is proportional to return, therefore, investments made within a certain risk level will get maximum return, which helps separate those funds that perform better form the stragglers.
There are many asset management companies working in India, so it’s important to study performance which will help decide on the appropriate mutual fund. Once the money is invested, the money is pooled into different assets. An equity fund would hold all equity related financial instruments, while a debt fund would invest into bonds, debentures.
The most important factor that decides if you’ll meet a target or no depends on the nature of the investment .You need to first decide which asset class to invest into. The choice comes down to either debt or equity.
The different prices depend on the kind of mutual fund. Those with the higher chance of decreasing in value also are the same funds that can yield good returns over a period of time. The lesson is that there are two sides to risk: your investment values will vary but that is exactly why you can expect high returns.
Debt refers to bank deposits, government backed deposits, and other deposits and mutual funds that invest in debt paper. Equity refers to stock and equity mutual funds both. Debt is obviously less risky than equity, but if you’re planning for a precise investment, you should think of debt and equity differently.
The risk and return curves of both varies in a different way and over different time scales. This is the notable difference between the two. Debt returns are relatively predictable and there are many government backed deposits available to investors in India.
Risk i.e. volatility, refers to the up and down activity in the markets, along with other various issues that may occur over a period of time. This volatility can be attributed to interest rate changes, inflation, or certain economic conditions. This uncertainty does cause a lot of worry to investors, as we all naturally would become scared when a stock we have invested in has plummeted greatly. However, this volatility also does earn high returns over time, as opposed to a savings account.
Debt returns are usually low and merely exceed the inflation rate. Equity returns can be potentially higher but can also be very volatile. But equity volatility usually doesn’t last too long. For any investments kept longer than 3, 4, or 5 years, equity investments are likely to give good solid returns, if you stick to the large cap companies and slowly invest, such as through an SIP.
The entire return to risk ratio is far more attractive with equity than debt at a long time period, as the risk with equity drops over time. To put it simply, go with debt for the short term and equity for the long term.