Types Of Mutual Funds: Plan Your Investment
Mutual Fund is considered to be an ideal investment instrument for individuals/retail investors. The professional management of fund along with proven past record does instill confidence in the fund. However, Mutual Funds are subject to market risk and fluctuations. To overcome the fluctuations and mitigate the associated risk, Mutual Funds allow investment in diversified asset classes. There are various types of Mutual Funds for prospective investors. Based on the future financial goals and tenure of investment, Individuals may consider following types of mutual funds for Investment. These different types of mutual funds offer investment for short and long term with fixed or market linked returns.
Types of Mutual Funds
The accumulated wealth from the investors is invested in shares of the Publicly Listed Companies. Thus the return on the investment is directly linked to the performance of the stocks. These stocks on basis of the capitalization are termed as Large Cap, Mid Cap and Small Cap. The investment in these kind of Funds is a lot risky as it is directly linked to stock market performance. However the potential of earning is also very high in these types of Investments. Here the investments are again diversified to different sectors such as IT, Infrastructure, Pharmaceuticals, Banks etc. This helps to reap the gains of any sector doing well and at the same time negate the effects of underperforming sector. Here the selection of stocks for investment is done by the Professional Fund Managers after analyzing their future growth potential.
These Equity Funds include Diversified Funds, Sector Specific Funds, Index based Funds and Equity Linked Savings Scheme (ELSS).
These types of investments focus on the current potential to earn rather than in future. It takes care of steady flow of income to the investor. The funds here are invested in companies which offer high dividends and also in debentures, certificate of deposits, commercial paper, bonds and securitized debts. The payment is made to the investor on monthly or quarterly basis and considered to provide Stable Returns. The returns on investment or the interest do tend to fluctuate with the market trends. However these fluctuations remain within specified range and do not bring any adverse effect on the principal. The return is generally higher than other form of regular income. It is a perfect kind of investment of Individuals looking for stable regular risk free income.
These include Corporate Bonds, Gilt Funds (Government Bonds), Debentures, Money Market Funds and Commercial Papers.
Investments here offer a mixture of income along with capital protection. It tries to bring balance in the portfolio through diversified investment. Thus these kind of investment not only shields from downturn but also mobilizes fund to better viable options. The combination of investment includes stocks and bonds while some even include Gold. The fund manager chalk out the balance of the fund with respect to the allocation to be made in stocks, bonds and gold. At the time when the market is not doing too well these are the perfect form of investments as they provide better return and growth for the investment. In India, it has been observed that the over a long time they do provide decent return on investment.
The investments in these funds are of three types: Monthly Income Plans, Capital Protection Fund and Asset Allocation Funds. The investor can chose from them based on market scenario.
Sector/Sector Specific Funds
Here the Fund Managers target a single sector for the purpose of investment. The reason behind this is that the study has shown tremendous growth for the companies in the specific sector which can provide very high returns. Thus the investment is focused on Securities of the specific Industry. However, as the allocation is made in a specified sector it also carries a lot of risk since the fund is totally dependent on the sector’s performance for growth and return. This type of investment does not provide diversification of funds so investor should be very careful while investing. But on the other hand, they can also provide great returns and growth too.
These are special types of fund here the diversification of fund is very broad and in the overseas market. Here the Fund Management identifies the best securities available in the Global Capital Market. Following which the assets are allocated in the respective market. It ensures return on the investment even when the domestic market is under performing or is perceived as vulnerable. Furthermore, these kinds of investments are closely monitored by the governing body to rule out possibilities of fraud or money laundering through such funds. The SEBI has formulated laws to regulate these kinds of investments and ensure transparency.
Exchange Traded Funds (ETFs)
These funds do not trade on the stock or bonds but is based on the index representing stocks, commodities, or a sample of assets. The portfolio while buying and selling of stocks replicates the price at which the native index trades. Here the investment is dependent on the Index performance and return is based on it. These types of investments reflect the market sentiments and trend pattern at the given point.
Here the funds are allocated to the index. The performance of the fund is dependent on how the Index pans out over a period of time. Here the cost of investment is quite low and it is very transparent in nature. Here the risk on the investment is quite low and the investors themselves can keep a track of the investment. However compared to ETFs it is a bit more diversified in nature as it may include stocks from wide range of sectors.
Funds of Funds
In this kind of investment the allocation is not directly made into stocks or commodities rather it is invested in the funds which have already invested in stocks, bonds or commodities. Here the diversification of the fund is wide as it has diversified portfolios of diversified investments. However these are very expensive as it involves complex diversification and management of Investment.
Money Market Funds
These are open ended funds and invest into short term debts instruments. The funds are vested into debts instruments such as the treasury bills. They provide relatively lower return on the investment and are for a short duration. The investments in these funds are considered safe and carry minimum amount of risk.
These were the popular types of mutual funds available for investment.