A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
What are the different types of risk profiles in which investors can be classified?
Just like we have different categories of mutual fund schemes depending on their risk, we also group investors into similar categories based on their risk profile. Investors can be classified into aggressive, moderate and conservative risk profiles based on two factors. An investor’s risk profile depends on his ability to take risk (risk capacity) and willingness to take risk (risk aversion). If an investor has both a low willingness and a willingness to take risks, we call him a conservative investor who should invest in low-risk investment products such as debt funds, FD banking.
If an investor
has a high ability and willingness to take risks, it is better that such an investor is advisable to invest in aggressive risk category products such as equity mutual funds, direct capital. However, if an investor has a high willingness to take risks but a low ability to take risk or vice versa, it is advisable to invest in moderate-risk investment products. These investors are referred to as moderate investors who would like to take moderate risk that does not endanger their lives. They prefer to invest in balanced mutual funds.
Investments are considered suitable for an investor if the risk of the investments is within the limit of the investor’s risk capacity and risk aversion.