Types of Mutual Funds as Investment Instruments
- Equity Mutual Funds
- Money Market Mutual Funds
- Balanced Mutual Funds
- Capital Mutual Funds
- Fixed Income Mutual Funds
Mutual Funds are one of the instruments you can choose when you want to invest. However, before diving in, it's important to know that there are various types of Mutual Funds to consider. One popular option is Fixed Income Mutual Funds.
Additionally, other types of Mutual Funds might suit your needs and goals. Here’s a brief overview of each one.
Types of Mutual Funds as Investment Instruments
There are five main types of Mutual Funds you can consider for your investments: Equity Mutual Funds, Money Market Mutual Funds, Balanced Mutual Funds, Capital Protected Funds, and Fixed Income Mutual Funds. Let’s take a closer look at each one:
- Equity Mutual Funds
As the name suggests, Equity Mutual Funds are investment instruments where at least 80% of the funds are allocated to stocks. These funds are often chosen by investors because they offer the potential for the highest returns compared to other Mutual Funds.
In this type of fund, Investment Managers will allocate the funds to various stocks. Typically, Equity Mutual Funds are chosen by investors who plan to invest for more than five years. In other words, the investment period of an Equity Mutual Fund is relatively long compared to other types of Mutual Funds.
This is due to the high risk and volatility associated with stocks. For example, during the financial crises in Indonesia in 1998 and 2008, it took two years for this instrument to recover.
This is why Equity Mutual Funds are suitable for investors looking for long-term returns—over five years. If you want faster returns, this might not be the best option for you. - Money Market Mutual Funds
Another option to consider is Money Market Mutual Funds. In this type of fund, 100% of the capital is allocated to domestic money market instruments by the Investment Manager.
The money market is a sector of the financial system that deals with the trading of short-term financial instruments or securities. It also involves interest rate derivative transactions and short-term lending activities, such as deposits, demand deposits, bonds, and savings accounts.
Money Market Mutual Funds are often chosen by beginner investors because they carry the lowest risk and are relatively stable compared to other Mutual Funds.
This fund is also ideal for investors with a conservative risk profile. On the other hand, it might not appeal to more aggressive investors. Despite the low risk, investors should still be mindful of inflation, which can erode purchasing power.
The investment duration for Money Market Mutual Funds is typically under a year, making it suitable for those looking to gain returns in the short term or for urgent needs, such as an emergency fund. - Balanced Mutual Funds
As the name implies, Balanced Mutual Funds allocate funds across various securities simultaneously, including stocks, bonds, and money market instruments.
The portfolio composition of Balanced Mutual Funds cannot exceed 79% in any one instrument. The Investment Manager will allocate the funds based on the specific needs, such as allocating 70% to stocks and the rest to other instruments.
Compared to Equity Mutual Funds, Balanced Mutual Funds have a lower risk, though they also offer lower returns.
Although it carries higher risk than Fixed Income Mutual Funds, this type of fund is still a popular choice for beginner investors and is also favored by professionals.
Balanced Mutual Funds are usually chosen by investors looking for a medium-term investment, typically more than three years but not as long as ten years. - Capital Protected Funds
Capital Protected Funds, or Capital Protected Mutual Funds, work similarly to time deposits in that they offer regular payouts and have a fixed term or maturity. Additionally, the principal investment remains intact upon maturity.
In this instrument, the Investment Manager implements a passive management strategy, meaning they buy bonds and hold them until maturity.
This approach sets Capital Protected Funds apart from Fixed Income Mutual Funds, which use an active strategy, although both involve bond investments. With this strategy, investors can expect a more predictable return or interest rate.
Although the principal is fully returned at maturity, Capital Protected Funds still carry risks, including asset fluctuations, credit risk, and company rating changes. Therefore, investors should remain aware of these risks to maximize their investments. - Fixed Income Mutual Funds
Fixed Income Mutual Funds are investment instruments where at least 80% of the funds are allocated to fixed-income securities, such as bonds or debt instruments.
The risk level of this type of Mutual Fund is low, though still higher than Money Market Mutual Funds. As such, Fixed Income Mutual Funds are suitable for beginner investors or those with conservative to moderate risk profiles.
What’s appealing is that Fixed Income Mutual Funds tend to offer higher returns than Money Market Mutual Funds or fixed deposits, with average annual returns historically ranging from 7% to 9%. This aligns with the fund’s goal of providing stable returns.
This type of fund is ideal for those looking for short- to medium-term investments, typically one to three years. The returns from Mutual Funds can be used for needs within that timeframe, such as saving for your child's school fees in two years.
From the explanation above, you now have a better understanding of the different types of Mutual Funds available as investment instruments, including Fixed Income Mutual Funds. If you're interested in this type of investment, DBS Treasures priority banking is ready to be your wealth management partner.
With DBS Treasures, your funds will be managed by professional Investment Managers to maximize your investment returns, and risks will be minimized through diversification.
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Additionally, the digibank by DBS Application makes it easy to manage all your investment activities, such as buying, selling, switching, and even registering for a Single Investor Identification (SID).
Now that you’re aware of the benefits of investing in Fixed Income Mutual Funds with DBS Treasures, there’s no need to worry about getting started. For more information on this investment, click here.