Mutual funds are pooled investment vehicles wherein asset management companies raise capital through different investors. Mutual funds can be broadly categorized into equity funds, debt funds, and hybrid funds. You can invest in such funds either through a one-time investment route or SIPs. SIPs or Systematic Investment Plans are popular among investors due to the benefit of rupee cost averaging.
- Equity/Growth funds
These funds have asset allocation in stocks across the market to maximize returns. These are directly linked to the markets, may witness volatility, and hence are recommended for long-term investments only.
- Debt funds
The asset allocation of these funds is primarily in the highest-rated government securities, debt instruments, corporate bonds, and other money market instruments. As these are considered to be less risky, returns are fairly steady, generally preferred by investors with a conservative approach.
- Hybrid funds
As the name suggests, these funds invest both in equity shares and debt instruments and are generally preferred by investors of moderate risk appetite.
Hybrid vs equity funds
Before choosing any type of mutual fund, it is important to understand the difference between hybrid and equity mutual funds, which is primarily due to the following factors:
- Asset base: Equity funds invest primarily in stocks across markets, whereas hybrid funds invest in a combination of equity and debt instruments.
- Liquidity: Equity funds have a greater degree of liquidity than hybrid funds.
- Underlying risk and returns: Equity funds have a greater level of risk due to the underlying assets, and hence the returns are also higher. Equity funds are directly linked to stocks, and hence they give slightly higher returns eventually, preferred by young investors with higher risk tolerance. Hybrid mutual funds, on the other hand, provide a trade-off between risks and return by allocating a portion of investments in debt or fixed income securities and hence mitigating the risk.
- Investment horizon: Equity funds are recommended for a longer time horizon (more than five years), whereas hybrid funds are recommended for the medium term.
How to plan your mutual fund investment?
Once you have decided to plan for your dream, you can choose to invest either in equity or hybrid mutual funds, depending on your age, investment horizon, and end goal from the range of mutual fund investment schemes.
If you are a first-time investor, it is advisable that you start with investing in large-cap equity funds, where volatility is less compared to other equity funds. In case your risk appetite is less, hybrid mutual funds could be best suited for you.
