The first thing to understand is that mutual funds are investment vehicles, and that simply means that investors pool their money together and then the mutual fund invests that money on their behalf. The easiest way to understand this is to think that as an individual investor you would’ve gone to the stock market and bought a share, but now as a mutual fund investor you buy a mutual fund unit, and then the mutual fund pools together your money with money from other investors and then goes and buys shares on your behalf.
There are four main type of mutual funds based on what they invest in.
1. Equity Mutual Funds: These are mutual funds that invest in shares of other companies.
2. Debt Mutual Funds: Debt mutual funds are mutual funds that invest in debt instruments so they may buy debentures of a company or government and other such things.
3. Commodity Mutual Funds: These are mutual funds that own commodities like gold, and in reality, India only has gold based mutual funds.
4. Hybrid Mutual Funds: Hybrid mutual funds invest in a mix of the above three classes at the same time. So for example, they may invest 65% of their money in shares and 35% in debt.
The answer to which mutual fund you want to invest in depends on what you actually want to buy and your appetite for risk.
If you want to invest in shares and understand that investing in shares can sometimes mean that you even lose your capital then equity funds are for you.
If you want to be safe and protect your capital then you should only invest in debt mutual funds.
If you were interested in getting returns from gold then you should invest in a gold mutual fund. A hybrid fund is for someone who needs a balance.