A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want.
The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.
Your money is managed by highly qualified professional with their experienced research team that continuously analyses the performance and prospects of companies to manage your investments and get higher returns.
Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.
Liquidity nature of the schemes allows you to redeem all or part of your investment any time you wish and receive the current value of the shares. The process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.
TYPES OF MUTUAL FUND SCHEMES
MUTUAL FUNDS OFFER YOU VARIOUS TYPES OF SCHEMES. WHETHER YOU ARE A ‘RISK-TAKING’ INVESTOR OR A ‘RISK-AVERSE’ INVESTOR, YOU WILL FIND SCHEMES SUITABLE TO YOUR NEEDS. TAKE A LOOK…
Do you enjoy the gyrations of the stock markets and want to be a part of it? Or are you more comfortable with a stable but steady investment? Whatever is your choice, mutual funds could be suitable for you. If you like taking risks and look forward to the possibility of higher returns, you may opt for equity funds. If you desire “safer” investments, you can opt for debt funds. What do you do if you want a little of both? Simply, opt for balanced or hybrid funds which invest both in equity and debt.
In addition to offering investors different types of schemes based on the underlying assets, mutual funds also offer two kinds of structures – open-ended and close-ended.
Mutual funds based on structure
These funds are always open for you to invest in or exit from. They have no end date. These schemes offer you the convenience of buying or redeeming the units during any business day at the prevailing Net Asset Value (NAV).
These funds are open for investment for only a short period of time during their ‘New Fund Offer’ (NFO) period. Once the offer closes, no new investments are permitted. Besides, the scheme remains in existence for only a specific period of time after which it closes down and all the money is returned to the investors. These schemes are listed on the stock exchange so that if an investor wants to exit, he can sell his units through the exchange at the market price. Some schemes start off as being close-ended and then become open-ended, nearer to their redemption date.
Mutual Funds Based On The Underlying Assets
Equity funds invest predominantly in equities with a small portion in money market securities. The objective is to generate potentially superior returns by taking on higher risk. As these funds invest in stocks, returns do fluctuate thereby posing higher risk. Therefore, these funds are not for risk-averse investors.
Equity funds can be further categorized as –
Diversified funds: These funds invest in equity of companies across market capitalizations (the market value of a company’s shares) and sectors. Equity Linked Savings Schemes (ELSS) and the Rajiv Gandhi Equity Schemes (RGESS) are variants of these, offering tax benefit on the investment[VAC1] . However, you need to keep in mind that you need to stay invested for three years to be eligible for the tax benefit.
Sectoral funds: These funds invest in companies of a particular sector. For instance, an IT sector fund will invest in just IT companies while a banking sector fund will invest only in banking stocks. These funds are relatively of higher risk due to their sector concentration. And then there are the thematic funds like infrastructure funds which invest in a particular investment theme.
Index funds: These invest in equities of companies forming part of a stock market index. The fund invests in these companies in the same proportion as their weightage in the index. Thus, returns offered by these funds largely match the returns generated by the underlying index, subject to certain tracking error. For instance, an index fund which is based on the BSE Sensex will invest in stocks forming part of the Sensex in the same proportion or ratio as the constituent stocks in the Sensex.
These funds invest in equities and debt investments in varying proportions. Balanced funds invest predominantly (more than 65% of the corpus) in equities with the rest in debt. These are relatively more stable than pure equity funds.
Monthly Income Plans (MIPs) invest about 75 to 80% of their corpus in debt and the rest in equities. The objective is to aim for steady returns offered by debt with possible capital appreciation offered by equity to provide a kicker to the returns.
And there are also funds called Asset Allocation funds that vary their equity exposure widely from 0% to 90% based on the market outlook. These funds do not have a fixed asset allocation.
Other types of funds
These funds invest in fixed income bearing instruments like corporate bonds, debentures, government securities, commercial paper and other money market instruments. These funds are relatively low-risk-low-return schemes. The returns from debt funds include interest receipts and capital gains. If you desire relatively stable performance, these schemes are right for you.
Debt funds can be further categorized into –
1. Money market or liquid income schemes: Liquid or money market funds invest in highly liquid money market instruments for very short investment periods such as a few days. These funds are suitable for parking surplus money for a very short period of time.
2. Gilt funds: Gilt funds invest in sovereign securities like central and state government bonds. These carry no credit risk but are subject to interest rate risks. The prices of these securities fluctuate with interest rate movements. These funds have varying investment periods to suit investor needs.
3. Income funds: These funds invest in government securities, corporate bonds and debentures apart from money market instruments. These funds carry a slightly higher risk than gilt funds as they are exposed to credit risk. Income funds come with various investment horizons like ultra-short term, short term, medium term and long term funds to suit varying investor needs.
4. Fixed Maturity Plans (FMP): These have a fixed tenure like deposits, though no return is promised or guaranteed. These funds invest in securities that mature in line with the fund’s maturity.
EXCHANGE TRADED FUNDS (ETF)
ETF is a fund whose units trade like a stock on the stock exchange. These could be based on a stock index or any other underlying asset. These can be bought and sold only in the stock market at real time prices which could be different from its unit NAV. These have lower expense ratios when compared to index funds and other equity funds. You would need a demat account to invest in these funds. These funds aim to closely mirror the returns generated by the underlying asset.
Gold ETFs are funds that are based on gold. You can bet on gold without buying physical gold by investing in these gold ETFs. With these funds, you are not only relieved of the hassles of safekeeping your gold but are also assured of purity since these funds invest in certified gold bars. You are also spared of the wastage and making charges that you would typically incur when you buy gold from jewellers. With certain forms of paper gold, you also get the option of converting it to physical gold with select jewellers.
FUND OF FUNDS (FOF)
FoFs invest in other mutual funds either of the same fund house or others. There are funds that invest in mutual funds abroad. There are multi asset funds too that invest in units of debt, equity and gold too. It is easy to achieve diversification and lower risk through FoF. However, you will have to bear higher management expenses.
Now that we have learned about different types of mutual fund schemes, lets read more on different types of mutual fund in India that will help you select best mutual funds to invest in based on your investment objectives.