What Is a Mutual Fund?
An investment vehicle which consists of a sum of money collected from several investors for the purpose of investment in different types of securities such as shares, bonds or money market financial securities is known as a mutual fund. The money managers manage the mutual funds and invest the capital in different types of securities to earn capital gains for the investors. The investments are made considering the risk appetite and return expectations of the investors and to meet the objectives of the mutual fund scheme.
Mutual funds offer a chance to small investors to gain access to a professionally managed and diversified portfolio of equity, bonds as well as other financial securities which may be difficult or nearly impossible to have with less capital amount. Each investor gets returns as per the units allocated by the mutual fund. You can buy or redeem the mutual fund units at the current net asset value or NAV of the fund.
Different types of mutual funds
Mutual funds are becoming an increasingly popular investment option for investors because of their simplicity. Small investors get the benefit of professional advice as well as a diversified portfolio of investments, which would have not been otherwise possible with less amount of money. Small investors who do not carry enough experience of the share market or have no time to track the market trends can definitely opt to invest in mutual funds.
As the mutual funds are managed by a trained and expert fund manager or money manager who track the market on a regular basis,you do not need to worry much about the returns on your investment in mutual funds.
There are various mutual funds types available for investment and the investor has a lot of options to choose from. Based on your investment needs, risk appetite and return expectations, you can choose from the various kinds of mutual funds that are available.
Criteria for classification of mutual funds
It is possible to classify mutual funds into different types based on the following criteria:
- Asset class (for instance, debt or equity)
- Sector (for instance, infrastructure or IT sector)
- Investment objective (for instance, growth or dividend option)
- Flexibility (for instance, close or open ended mutual funds)
- Type of the equity investment (for instance, blue chip, large or mid cap funds)
- Special funds (for instance, hedge funds or index funds)
Types of mutual funds depending on the type of asset class
Equity Funds: These types of mutual funds invest in shares that are listed on the various exchanges or share markets. By investing in equity mutual funds, you are not directly investing in shares and hence limiting your risk associated with the fluctuations in the share market. All the investments are made by the money manager on behalf of the investor.
Equity mutual funds may invest in a variety of sectors such as IT, power or infrastructure and they may be large cap, mid cap or small cap stocks.
Debt funds: Bond or the Debt mutual funds make investments in Government issued bonds as well bonds issued by other institutions. The investment portfolio of securities may include Government securities, Public Sector Unit or PSU bonds and corporate bonds.
The risk involved in debt funds or bond funds is much less and they usually give a fixed rate of interest. Investment in these kinds of mutual funds is good for investors searching for lower risk, good stability as well as a regular source of income.
Types of mutual funds depending on type of returns
Growth fund: Growth mutual funds aim at high growth and greater rate of return by way of aggressive appreciation of capital. The investment objective of this type of fund is to generate good returns over an extended time period. As compared to a mutual fund with regular income, the growth funds tend to be more volatile and risky.
Regular income or dividend funds: These types of mutual funds are ideal for investors looking to generate regular income from their investment in mutual funds. Here, appreciation of the invested capital is not a primary goal. These are a safer bet compared to growth funds.
Special types of mutual funds
Balanced Funds or Hybrid Funds: These type of funds invest in a variety of assets. The investment portfolio is highly diversified including stocks and bonds, cash as well as other assets. This type of mutual fund helps in diversifying the risk while increasing the return on investments as all your eggs are not put in one basket.
Fund of Funds: This is a different kind of mutual fund that invests in mutual funds all across the globe or in different countries. The portfolio of funds in this case would include sub-funds and hence it is known as fund of funds.
A fund of funds also provides diversification as well as proper asset allocation. This type of fund invests in a wide range of fund categories that are all combined into a single fund for providing maximum benefit to the investors.
Posted in Mutual Funds category.