Mutual funds are primarily basic investment funds. These funds are professionally managed, and they work on a simple principle of pooling money from investors and using it to purchase securities. These investors can be retail or institutional in nature. These funds charge a small fee for managing your money.

Mutual funds are an excellent investment means for regular investors who do not know much about investing. Investors can choose a mutual fund scheme based on their financial goal and start investing to achieve the goal.

Investors can also bank on exchange-traded funds or ETF. They are similar to index mutual funds, but they trade just like stocks. Investing in ETFs or mutual funds is a basic necessity to stay out of the rat race.

How should one invest in mutual funds best?

One can either invest directly in mutual funds or can go through an agent by hiring the services of a mutual fund advisor. If you invest in yourself, you will have to invest in the direct plan of the mutual fund scheme. If you choose to invest through an intermediate advisor, you will invest in the regular program of the mutual fund scheme. If you invest directly, i.e., without an agent, you would have to do adequate research before investing, complete all the formalities and keep a check on your investment status all by yourself. To begin investing, one can look up the mutual fund website which provides detailed information as to how to handle proceedings.

Every investor looks towards investing in the best mutual funds scheme. The 10 best mutual funds are as follows:

• ABSL Top 100 (G)
• ABSL Top 100 – Direct (G)
• Invesco India Dynamic Equity (G)
• Invesco India Dynamic Equity – DP (G)
• Kotak Select Focus Fund – Direct (G)
• Kotak Select Focus Fund – Regular (G)
• ABSL Small and Midcap Fund (G)
• ABSL Small & Midcap -Direct (G)
• L&T Emerging Businesses Fund-DP (G)
• L&T Emerging Businesses Fund-RP (G)

Common types of mutual funds:

Money market funds

This kind of mutual funds invests in short-period fixed-income bonds such as treasury bills, bankers’ acceptances, commercial paper, government bonds and certificates of deposit. This type of fund has a lower potential return than the other common types of mutual funds. The benefit of this type is that is a safer investment compared to the rest.

Fixed income funds

These funds purchase investments that provide a fixed rate of return like government bonds, investment-grade corporate bonds, and high-yield corporate bonds. This type of fund is also a safe investment fund and provides a return on a regular basis. The money majorly comes in from the interest that the fund earns.

Equity funds

Equity funds invest majorly in stocks. These funds are high-risk investments and aim to capitalize faster than the market usually provides. These are not fixed income funds, and hence there is a higher risk of losing money. There is a varied range of equity funds from which you can choose to invest in like growth stocks (which don’t pay dividends), income funds (which hold stocks that pay hefty dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks or combinations of these.

Balanced funds

Balanced funds invest in a mix of fixed income securities and equities. These funds try to maintain a correct balance between achieving higher returns and losing money. These funds divide the money into different types of investments by mathematical operations and hence is inclusive of specific calculated risks. They have more risk as compared to fixed income funds, but lesser risk where pure equity funds are concerned. Conservative funds hold fewer equities on bonds.

Index funds

Index funds work towards tracking the performance of a specific type of index like the S&P/TSX Composite Index. The value of the mutual fund depends upon the fluctuation of the index and will go up or down when the index goes up or down respectively. These funds generally have lower costs than actively managed mutual funds because the portfolio manager does not have to do a lot of market research and there are not many investment decisions to make too.

Specialty funds

These funds focus on specialized mandates such as real estate, commodities or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights and diversity, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.

Fund-of-funds

These funds invest in other funds. Similar to balanced funds, they try to make asset allocation and diversification more manageable for the investor. The MER for fund-of-funds tends to be higher than stand-alone mutual funds.

Portfolio managers use different styles of investing depending on the various circumstances posed by the market. They do an adequate amount of market research to compare investing options. Choosing funds with different investment styles allows the investor to diversify beyond the type of investment. This narrows down the risk of investing and provides an adequate amount of security.