Mutual funds, today, among investors are a preferred choice. It is due to their diversified portfolio and attractive returns. An investor can now invest in direct mutual funds. There is no set of schemes or a single scheme that works suitably for everyone. A mutual fund scheme is suitable for each individual as per their investment risk or objective.
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Fund Types and Style
The goal for a growth fund is capital appreciation. Planning to invest in the long-term can involve volatility and risk in fair amounts. However, a beneficial choice is to enjoy a capital appreciation fund for the long-term. These funds have a high percentage of assets in stocks and are risky. Nevertheless, with more risk, over time, the returns are greater. Holding a mutual fund type requires a time frame of five years or more.
Capital and growth appreciation funds do not pay dividends. If you wish to invest in direct mutual funds, receive an income, look for an income fund. Such funds buy bonds and pay interest regularly. Corporate debt and Government bonds are two common holdings to get income funds. Their scope is narrow, and the funds differentiate relying on time horizons such as short, long, or medium term.
However, bond funds carry risk even with low volatility. It includes:
- Changes in bond prices, risk sensitivity, and interest rates. The prices of a bond may go down and the interest rates up.
- The risk of credit impacts the bond price if the rating is low.
- The bond issuer defaults on debt obligations are default risk.
- Bondholder paying early the bond principal to earn the benefit of debt reissuing at a low-interest rate is prepayment risk. Investors are unable to reinvest and receive an interest rate.
However, include bond funds for diversification purposes, even with its risks. A balanced fund also is the best alternative that allows investing in bonds and stocks.
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How to Invest in direct mutual funds?
The common approaches to investing in mutual funds include:
- Top-down approach- It is to look at countries or industries that present a big economic picture. It is to invest in the chosen country or industry, in specific companies.
- Bottom-up approach- You may concentrate on specific companies that are performing well. Regardless of the prospects of the economy or the industry, you may invest in direct mutual funds.
- Top-down and bottom-up combo approach– It is a portfolio manager deciding the countries favorable to build the stocks portfolio as per the bottom-up analysis.
- Technical analysis – It is about attempting to forecast the investment price direction by going through the past market data.
A myth – Best Mutual Fund
The best mutual fund concept is a myth. There is nothing as best mutual funds. The mutual fund doing well today may drop tomorrow or generate high returns.
Likewise, the mutual fund performing worse today may become the mutual fund best performer tomorrow. Chasing the best mutual funds illusion leads to huge losses many times, and they may also miss fulfilling their investment objective.
It is that an investor wishes to invest in direct mutual funds for one to three years, and it provides the best returns. However, it is not the perfect way of investing in mutual funds. So, while considering mutual fund investment, determine your objective for the investment.
The right way of investing is to find a mutual to help you meet your investment goals. However, you can find your goal with these 2 questions:
- For how many years, you want to invest?
- How much risk can you manage or take?
On answering these 2 questions, you can know the mutual fund category that is a suitable fit as per your investment objective.