New investors in the stock market are always advised by the experts to invest in the stock markets through mutual funds. 

It is easier said than done. There are so many different types of mutual funds out there that it can perplex even a seasoned investor. There are money market funds, dividend funds, equity funds, index funds, sector specific funds, small cap, large cap funds to name just a few.

Here is a little help in an introduction to mutual fund investing.

Mutual funds – a basic definition

A mutual fund pools together money from individuals for a common investment purpose. The pooled money is professionally managed and invested into stocks or bonds with the goal of generating profits for the shareholders (Mutual fund investors). When you invest in a mutual fund, you are buying shares and thus become a shareholder of the fund.

There are many different types of mutual funds, but here the most common ones:

Money market funds

These are the safest type of mutual fund because they invest in cash. You deposit a fixed amount for a fixed period of time, ranging anywhere from 30 days to one year, and you’re almost certainly guaranteed a fixed rate of return. You’ll typically earn about 2% to 3% more interest than if you place your money in a high interest savings account.

A money market fund is right for you if you are conservative with your money and have a low tolerance for risk when it comes to investing.

Fixed income funds

This type of mutual fund invests in a combination of government and corporate securities, such as treasury bills, bonds and mortgages. They provide fixed periodic payments with the possibility of some capital gains. These funds are usually low risk and dependable overall; however, their value is affected by changes in interest rates.

A fixed income fund is right for you if you are looking for a relatively safe way to introduce yourself to investing and security, stability and moderate returns are also important investment goals for you.

Balanced funds

These funds include a little bit of everything—stocks, bonds, cash and mortgages—in order to provide a combination of income and growth. These funds seek to maximize the growth potential of your investment while preserving the capital.

A balanced fund is right for you if you are looking for long-term growth possibilities with stability. Balanced funds tend to be costly but can be a worthwhile investment if want a diversified portfolio in one fund and you don’t want to manage your own asset mix or don’t have an advisor to do it for you.

Dividend funds

These funds are designed specifically to provide maximum dividend opportunity. A dividend is how a company pays the people who own its stock. Dividend funds invest in high-quality common shares from blue chip companies (i.e., well-established, financially-sound companies), such as Reliance Industries or Infosys for example, and preferred shares. There is the potential for long-term capital growth. Dividend funds also receive preferential tax treatment, which reduces the amount of tax an investor has to pay on capital gains.

A dividend fund is right for you if you have an interest in investing in corporations and receiving any profits made by the fund on a regular basis. Keep in mind, however, that dividends a