A mutual fund is a pool of money managed by a professional Fund Manager.
An investment options funded by shareholders that trades in diversified holdings and is professionally managed. A mutual fund is a kind of investment that uses money from investors to invest in stocks, bonds or other types of investment. A fund manager (or “portfolio manager”) decides how to invest the money, and for this he is paid a fee, which comes from the money in the fund.
It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” .
Types of Mutual Funds
Mutual funds are new age investment offering flexibility and more options to the investor. Mutual funds help to diversify the investment horizon by offering different mutual fund types based on financial goals, be it long term or short term. The risk portfolio of mutual funds is clearly divided into different asset classes such as equity, debt and money market.
Based on Asset Class
Equity Funds: Equity funds are mutual funds which invest majorly in equity stocks of the company. Equity funds are considered to be risky but they tend to give higher returns in the long term.
Debt Funds: Debt funds are mutual funds which usually invest in the government securities, corporate bonds etc. Debt funds are more stable and less volatile to the market conditions.
Money Market Funds: A money market refers to the mutual funds that are highly liquid and where the money is invested in short-term investments like deposits certificates, treasury bills etc. You can have your money invested in money market funds for duration like a day.
Balanced or Hybrid Funds: Balance or hybrid funds are a mix of equity and debt funds. They tend in to invest an equal amount in equity and debt funds to keep the risk level balanced in the investment.
Based on Structure
Open-Ended mutual funds: Open-ended fund is the most common type of mutual fund available. Mutual fund houses trade units of mutual funds at NAV (Net Asset Value). Open-ended funds provide exit anytime for the investor and make pay out on the basis of the NAV, which is published by the fund houses daily.
Close-Ended Mutual Funds: On closing of New Fund Offer (NFO), investors cannot trade their units. The price of the closed-ended mutual funds is based on the demand and supply just like stocks. Closed-ended mutual funds are not liquid and the prices are less than the normal price per unit due to less volume of trading. Investors cannot enter nor exit from the scheme till the term of the scheme ends.
Based on Investment Objective
Growth Funds: The money is invested in growth funds with the prime objective of getting a capital appreciation. Although growth funds are risky, they tend to offer high returns in the long run.
Income Funds: Money gets invested in fixed income instruments like government bonds and debentures under income funds. The objective of the income fund is stable income on investment with modern growth of capital.
Liquid Funds: The money gets invested in short-term financial instruments like treasury bills, deposit certificates for the purpose of providing ease of taking out money anytime. Liquid funds are considered to be low risk with average returns and are ideal for people looking for short-term investment.
Tax-Saving Funds or ELSS: ELSS or tax saving mutual funds come under the section 80C of the Income Tax Act, 1961 and qualify for a deduction of up to INR 1, 50,000 for a financial year. The majority of the investment gets invested in equity stocks. There is a lock-in period of 3 years on the ELSS investment.
Capital Protection Funds: The primary objective of these funds is to protect the money invested and thus the funds get split in between equity and fixed income investments.
Fixed Maturity Funds: In fixed maturity funds, the investment is made in closed-ended debt funds having a fixed date of maturity.
Pension funds: Money invested in pension funds are for a long period of time keeping in mind the long-term objective of getting a regular pension to the investor when he retires. The money in the pension funds gets invested in equity and debt instruments where equity helps the investment grow and debt funds maintain a balance of risk in the investment. The returns on the pension fund can be withdrawn as a lump sum or as regular pension or even the combination of the both.
Based on Risk
Low Risk: These types of mutual funds invest in debt market where the risk to the investment is very low. The investments tend to be long-term but due to the low risks associated with it, the returns are also moderate. Example of a low-risk mutual fund will be debt funds where the investment is made in very safe government securities.
Medium Risk: These investments carry medium risk to the investor. Medium risk mutual funds are ideal for those who are willing to take some risk to get good returns on their investment. The investment portfolio is a mixture of debt funds and equity funds.
High Risk: These investments are high and are for those who are willing to take a high risk on their investment for an expectation of high returns. High-risk investment invests a majority of the money (investment) in equity stocks of the company.
Based on Specialty
Sector Funds: Sector funds are the funds that stick to one sector of the industry when investing. For example – Real Estate mutual funds will only invest in those companies which are in real estate business or sector. The returns of the investment also depend on the performance of the particular sector.
Index Funds: The index fund is a type of investment which is made to match the working of a market index like BSE. These funds provide broader exposure to the market, less operating cost and low portfolio turnover.
Fund of Funds: Funds of funds are the types of mutual funds that invest in other mutual funds. The returns solely depend upon the performance of the target fund. These types of funds are also referred to as multi-manager funds.
Emerging Market Funds: In emerging market funds, the investment is made in the developing countries which are growing economically at a good rate. These funds are considered risky as a lot of other factors depend on the performance of political and economic situations of the particular developing country.
International Funds: International funds invest their money in the international companies located in other parts of the world. International funds are also known as foreign funds. The money in international funds will not be invested in the investor’s own country.
Global Funds: These are similar to international funds and invest their money in the companies located in all the parts of the world. The only difference from international funds is that investment can also be made in the same country of the mutual fund investment.
Real Estate Funds: As the name sounds, the real estate funds invest their money in real estate business. The investment in a real estate project can be made at any phase of the project.
Commodity Focused Stock Funds: The investment is done in companies that are working in the commodities market, for example, mining companies or producers of commodities. Performance of these funds is directly linked to the performance of those commodities in the market.
Market Neutral Funds: These funds do not invest directly in the market. They invest in securities, treasury bills with the aim of steady and fixed growth.
Inverse/leveraged Funds: These funds don’t operate as a normal mutual fund. They make a profit when the market falls and incur a loss when the market does well. The risk factor in such funds is very high as they can make you huge loss or profit as per the market conditions.
Asset Allocation Funds: These funds allow the portfolio manager to adjust the allocated assets to achieve results. The amount of investment gets divided into such funds to invest in different instruments like bonds and equity.