Introduction to Mutual Funds

If you are looking to invest in mutual funds then rest assure that you will find a mutual fund which is in accordance your requirements. In fact, there is a diverse portfolio of mutual funds out there which carries risks and rewards at the same time. But of course, the greater the potential returns, the higher the risk of a loss. Some funds might be less risky than others but at the end of the all funds do carry some level of risk – one cannot just hope for a risk free investment. This is facet applicable on all investments. Every mutual fund has predetermined investment objective that tailors the fund's assets,investment regions and investment strategies.

Start of Mutual Funds in India

India’s first mutual fund was established in 1963 in the form of Unit Trust of India (UTI) to allow people to participate in the financial market and make the economy stronger. Started jointly by the Reserve Bank and Government of India the basic premise of UTI was to encourage savings and investment, participation in the income and gains and profits coming to the corporation from holding and acquisition of securities.

Types of Mutual Funds

Classification of Mutual Funds

The financial market is home to a very diverse variety of mutual funds. Each type of fund is created to meet specific financial goals. So it is very crucial to know all available variety of funds in order to make wise investment decisions. Well, here’s the list of mutual funds:

Equity funds

If the majority of the money is invested in stocks it is known as equity mutual funds. Capital appreciation is the pivotal objective of equity funds. This classification of funds has the potential to enable investors earn higher returns. As equity funds are directly linked to stock market. But the flipside is they tend to be a bit risky, at least in the short-term. Moreover, investing in equity mutual funds needs a bit of knowledge and experience to begin with. Here are some benefits that equity mutual funds offer:

    • Well Regulated - Securities and Exchange Board of India works hard to protecting interests of interests. This it does by forcing transparency on the mutual funds. Thus, enabling investors to make an informed choice. The mutual funds need to disclose their portfolios on a regular basis to enable investors make out whether the fund is investing in line with its objectives or not.
    • Asset management cost is low - With mutual funds collecting money from a large pool of investors, the cost of asset management is spread in a big group. This reduces the asset management fee per person.
    • Professionally Managed -They are managed by professional and certified fund managers who have expertise and experience in financial markets.
    • Diversification – To minimise risk, equity mutual funds are spread in different securities of various companies across sectors and industries. In this way, there is a growth in the funds with the growth in the sectors they are invested in.

    Debt funds

    Debt funds are considered to be relatively less risky. These funds are ideal for investors who desire a steady income and are averse to risks. Invested in debts like government bonds, company debentures and fixed income assets, debt funds not only offer regular returns to the investor but are also considered as relatively safe investments.

    Hybrid or Balanced funds

    Suggestive by the name, these type of funds can be invested in different asset classes. This category of funds tries to achieve a fine balance between risk and return. This category can be invested in a mix of both fixed income securities and equities. Thus, allowing investors get the benefit of high returns at a verylow level of risk and yet at the same time offering them diversification.

    Tax-saving funds

    Everyone wants to do tax saving. So opting for Tax-saving mutual funds can be the best bet. Under this category of mutual funds investors can avail tax rebates under the income tax rules of the country. Under Section 80C of the IT act, investors get a deduction of up to Rs 1.5 lakh each year. It is important to note that not all mutual funds are eligible for tax benefits. Equity Linked Saving Scheme (ELSS) funds are a prime example of tax-saving funds.But on a flip side, the risk factor involved in these funds is considered as high.

    Sectoral funds

    Belonging to a specific sector or industry sectoral funds can be invested in businesses. Capable of offering higher returns to investors sectoral funds are considered as risky due to their focused exposure to a particular sector in the industry.Say for example a mutual fund investing solely in the pharmaceutical sector is a sectoral fund. Such funds are suitable for investors with a high-risk appetite and for those having considerable experience in the market.

    Index funds

    There are 30 stocks on the BSE Sensex and 50 stocks on the NSE Nifty. Now in case investors want to benefit from investing in all such stocks but don’t have the money to do so. Index funds are the best way to go about doing things. All index funds are constructed that all investment instruments represent a specific index on the exchange like the Sensex or the Nifty. Value of the fund moves just as the index moves and investing in an index fund is best for achieving diversification at a very minimal cost.

    Types of Mutual Funds According to Structure

    Mutual funds can be divided into open and closed ended schemes based on how subscriptions are accepted from investors.

    Open ended mutual funds

    These are the most common funds available in the market.Under this type, prevailing Net Asset Value (NAV) is used as the main criteria by fund houses to buy and sell units of mutual funds directly from the investors. There are exit options available for investors and they can use NAV as main criteria, considered as the actual worth of unit of mutual funds. NAV is published daily by the fund houses.

    Close Ended Mutual Funds

    Once the New Fund Offer (NFO) is closed investors can’t purchase or dispose their units directly with a fund house. Listed units of close ended mutual funds are traded in stock exchanges just like normal shares. They are not liquid and with trading volumes being very less on majority of the occasions, the traded price is less than fair price of the unit.

    Types of Mutual Fund according to investment objective

    Growth Schemes

    To generate wealth in long term for growth schemes are ideal as an investment option. For those investors looking to make say for instance goal based investment like child education, own a house and so on this is the most suitable option.

    Income Schemes

    For those who seek regular income from their accumulated wealth,income schemes are ideal. In fact highly suitable for people who are looking for a regular income for their regular needs. Like say retired people who wish to invest certain amount and have a regular income in form of a pension. Incomes are paid by way of dividends and pay out of dividends is not guaranteed by SEBI

    Balanced Fund Schemes

    These funds try to balance the components of safety of capital and capital appreciation.Via these funds investors have the opportunity of investing in a variety of assets for achieving the balance.