Know these things before investing in mutual funds

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We all have almost seen the advertisement of mutual funds which says “Mutual funds are subjected to market risk, read all the documents carefully before investing”. But, before doing an investment, we hardly try to know all the things related to mutual funds.

Mutual funds have three types of schemes: Open-ended, close-ended, and interval schemes. Open-ended schemes provide flexibility for entry and exit. In the case of close-ended funds, entry, and exit is possible only through the stock exchange. In interval schemes, flexibility for a definite period is given for entry and exit.

Mutual fund schemes have different types of natures: Equity, debt, and liquid. The equity nature of schemes carries a high risk and is suitable for investors who are interested in long-term investment. Debt schemes have lower risk and are suitable for short-term investment. Whereas, Liquid schemes are most safe and carry minimal risk of losses.

Following are some mutual fund schemes and features:

1.         Gold ETF:

•           It is an Exchange-traded fund

•           It is a type of mutual fund which invests in assets like gold.

•           No entry and exit load is there.

2.         Index funds:

•   Here, investment is done in top companies of stock market.

•           Risk is low in these funds due to diversification of investment.

•           It provides tax benefits.

3.         Sectoral funds:

•    It is a fund that invests only in a particular sector of the economy.

•          It carries risk as it is dependent on a particular sector.

•          Returns can increase if a particular sector grows.

4.         Overnight funds:

•           Here, money is landed to corporate companies for 1 day.

•           Liquidity is higher

•           Risk is low as it is a debt scheme.

5.         Liquid funds:

•           As the name suggests, liquidity is highest here.

•           It carries low risk.

•   Instant redemption facility is available.

6. Tax relief fund(ELSS):

•           Known as Equity-linked saving schemes.

•           It is covered under section 80c of the Income-tax act.

•           It provides tax benefits.

•    Generally, It has a lock-in period of 3 years.

Things that should be considered before investing are risk, return, regularity of income and other factors.

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