Mutual Funds
Navigating the world of mutual funds can be overwhelming, especially for beginners. With various types of funds, investment options, and market fluctuations, it’s essential to understand the basics. In this article, we’ll address common questions about mutual funds, including types of equity and debt funds, the importance of diversification, liquidity options, Net Asset Value (NAV), and how to cope with market volatility.
Whether you’re a seasoned investor or just starting out, this guide will help you make informed decisions and achieve your long-term financial goals.
My financial advisor tells me that there are equity and debt funds. What types of schemes are they?
Mutual funds come in various types. Equity funds invest in stocks for long-term growth and dividend income, while debt funds invest in bonds for relatively stable returns. There are 11 equity fund types and 16 debt fund types, plus hybrid funds that combine stocks and bonds. Funds are classified by market cap (large, mid, small, multi) and debt funds have categories like corporate, gilt, liquid, and credit risk. Choose a fund aligning with your goals, risk tolerance, time horizon, and budget.
Also read | How to invest in stocks through SIPs
Do I need both equity and debt funds?
A mix of equity and debt instruments is ideal, but not mandatory. It depends on your goals, time horizon, and liquidity needs. Equity funds offer long-term growth, but can be volatile, while debt funds prioritize capital preservation and income, with relatively stable returns. Consider your priorities: growth, income, or capital preservation, and choose accordingly.
Can I enter and exit funds at any time?
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Mutual funds usually offer liquidity, but with some conditions. Open-ended funds let you enter and exit anytime, though some charge an exit load (around 1 percent) for early withdrawal. Closed-end funds have a fixed tenure, but must be listed on the stock exchange for early redemption. Some liquid funds now offer instant redemption, getting your money back in minutes.
Also read | A step-by-step guide to open a demat account
What is an NAV?
Net Asset Value (NAV) is the fair value of a mutual fund unit, declared daily after business hours. It’s calculated by summing the market value of assets (shares, bonds, income), deducting expenses, and dividing by outstanding units. NAV is the price for buying/selling units directly with the fund. However, if traded on a stock exchange, the price may differ from NAV.
My fund’s NAV keeps going up and down. What should I do?
A mutual fund’s NAV changes daily, reflecting market fluctuations. Equity fund NAVs are more volatile, tracking share price movements, while debt fund NAVs are relatively stable, tied to bond prices. NAV drops if underlying securities’ value falls, like a credit rating downgrade. Focus on long-term goals, not daily NAV fluctuations, and review performance with your advisor if needed.