A mutual fund pools investments from shareholders to invest in bonds, securities, short-term debt, and bank deposits. The fund manager’s job is to produce positive returns for the investors which are then distributed to each individual investor according to his or her investment.
Types of Mutual Funds
Different types of funds operate in different markets. In Pakistan, there are mainly three funds:
- Money market funds
- Income market funds
- Equity market funds
If you are new to investing, money market funds are the best option because these funds are classified as very low-risk funds. A money market fund manager invests in mostly risk-free securities including short-term debt and Islamic bank deposits. Although the investor will not earn a big return, but the principal will be guaranteed. Typically, the return earned is slightly greater than a conventional savings account.
income market funds are classified as low-risk investments. They provide steady current income on a daily basis. The fund manager invests in high-quality corporate debt, sukuks, and commercial papers, among many other modes. The main mission of income market funds is to provide steady and regular cash inflows to investors.
Equity market funds are also known as stock funds. The equity fund manager will invest in stocks through a major market exchange, such as the Karachi Stock Exchange (KSE). Equity market funds are best suited to new investors because there is a huge reduction of risk due to the fund’s portfolio diversification and the initial investment requirement is relatively lower.
How to Invest in Mutual Funds
Firstly, you have to figure out what your investment goals are. Some questions you can ask yourself include:
- What is my risk appetite? Should I go for riskier or safer investments with low-risk?
- What are my financial objectives?
- How much return will work for me?
- What are the best performing funds in the current market?
Once you have asked yourself these questions, you can start your research into the best mutual funds. Once you have selected your fund to invest in, all you have to do is go to their portal, make an account, and start investing!
