What is Mutual fund?

What is mutual fund?Types of mutual funds.Is it right to invest money in mutual funds?

A Mutual fund pools money from different investors and invests the money in large group of securities such as bonds and stocks with the objective to get return.The mutual funds are managed by experienced and qualified professionals.These professionals invest money according to the objective of the fund.

The benefits of mutual fund 

• The money of investors are professionally managed.
• They are affordable even for small investors.You can invest with minimum of 500 rupees in a systamatic investment plan on regular basis.
• Risk is very small in mutual funds as they invest accross various industries and stocks.
• All mutual funds are required to register with SEBI.They are required to follow strict regulations for the interest of investors. 

The negative side of the mutual fund  

• That investors have to pay various fees and expenses.
• Mutual funds cannot be customised.
• The income is less predictable.

 

TYPES OF MUTUAL FUNDS

1. Equity Mutual Funds
2. Debt Mutual Funds
3. Hybrid Mutual Funds
4. Speciality Mutual Funds
5. International Mutual Funds
6. Exchange Traded Mutual Funds
7. Fund of Funds

1 Equity Mutual Funds :

Equity mutual funds are the funds that are invested in stocks.These funds try to generate higher returns.These funds are riskier then Debt and Hybrid mutual funds hence they can generate higher returns compared to both.Performance of company plays a key role in these funds.Equity funds are invested with almost 60% of its assets in equity shares of company in proportions.

Types of equity funds

       1.1 Based on market capitalisation :

• Large cap equity funds : Large cap companies are well established companies and they are having strong market presence.This type of fund invest in large cap companies.These funds are less riskier and are capable of offering stable return.
• Mid cap equity funds : Mid cap companies are mid sized companies.This type of fund offers more risk compared to large size equity firm but lower then small size equity funds.These funds are capable of offering higher return compared to large cap equity funds.
• Small cap equity funds : Small cap companies are those companies that are in initial phase of development.This type of fund is most riskier and are capable of offering higher return compared to large and mid cap funds.

       1.2 Based on sector :

• Sector fund : These are the funds that focus investment in a perticular sector.
• Diversified fund : These funds invest in different sectors and in different market capitalisation companies.
• Thematic fund : In this type of fund the investment is done on a perticular theme. They tends to be riskier as they face sectoral and market risk.

        1.3   ELSS : ELSS refers to Equity Linked Saving Scheme. This is a tax saving fund. In this  fund your                                          money gets locked for 3 years.You cannot invest in ELSS for less then 3 years. 

2 DEBT MUTUAL  FUNDS :

Debt mutual funds invest in fixed interest generating securities like coorporate bonds,government security.Debt security contains a fixed maturity date and also pays a fixed interest.The interest is decided by the issuer.The fund manager of a debt fund ensures that he invest in high quality credit instrument.Conservative investor can invest in Debt fund as there is very less risk.

Types of Debt Mutual Funds :

• Fixed Maturity Plans : These funds invests in fixed income securities like government bonds.These are just like bank FD'S as in this they have fixed maturity date.In this your money gets locked in for a perticular period of time.These are better then bank FD'S.
• Liquid Funds : These funds invest in those debt instrument which have a maturity of not more then 91 days.These funds are similar to depositing money in saving acount as they have same liquidity but these have more returns.
• Guilt Funds : These funds invest only in government securities.These securities are issued by government that's why they have very less risk.These funds are ideal choice for risk averse investors.
• Dynamic Bond Funds : In this fund the fund manager keeps changing the portfolio acording to the fluctuation in the interest rate.
• Junk Bond Scheme : These inludes high risk and also high return.

   3 HYBRID MUTUAL FUNDS : 

  Hybrid mutual funds invest in both debt and equity.These funds are good for those who are ready to take some     risk as it invest in equity and also for those who want to have some fixed return as they invest in debt.

Types of Hybrid Mutual Funds :

• Equity Oriented Balanced Fund : These fund invest more than 65 % money in equity and rest in debt instrument.Equity helps in providing good return and debt help in providing stable income.
• Debt Oriented Balanced Fund : A balanced fund is called Debt oriented if the fund invest more than 65% of money in debt and rest in equity.
• Monthly Income Plan :  MIP is the investment in which 60-90% of money is invested in debt instrument and rest is invested in equity.It is much safer option.However it is not risk free.
• Arbiterage fund : In arbiterage fund the fund manager buys stock at lower price in one market and sells the stock at higher price in another market.Money invested in arbiterage fund is safe but are taxed like that of equity fund

  4 SPECIALITY MUTUAL FUNDS : 

   In this type of mutual fund the investment is made predominently in one industry/sector/region.This fund is not       diversified in a sector/industry/region so it is highly dependent on how that perticular industry will perform.It is     high risk investment.However as high risk comes with high reward so this mutual fund can generate high return     but at cost of high risk.

  5 INTERNATIONAL MUTUAL FUNDS :

 

   International mutual funds can invest the fund outside the country.It provides the investors a lot of                          diversification by investing in many companies.They invest in companies that are suited for investment outside of    US.The return on investment is not known in this fund.

• Domestic-international  : In this mutual fund 65% of money is invested in domestic equity market and the rest of money is invested in foreign market.
• Thematic investment : In this the investment is made on the basis of perticular theme/sector/industry.
• Feeder investment : In this the fund invest money in another fund of another country which further invests in foreign stocks.

   6 EXCHANGE TRADED MUTUAL FUNDS  :

   Exchange traded mutual funds allows a standard mutual fund to trade real time on stock exchange.The performance of this mutual fund is directly linked with the performance of stock exchange.It offers both the benefits of mutual funds and the etfs.These funds are differ from etfs as they are not required to disclose their portfolio on daily basis.It offers both the benefits of mutual funds and the etfs.The benifit of this fund is that it has very less fees and also tax  advantage.

   7 FUNDS OF FUNDS : 

This type of mutual funds invest money in many other funds which can either be in domestic or international exchange.These funds have pre-specified the schemes in which they will invest the money.They are of advantages as investors will not have to choose different mutual funds scheme.