A Mutual Fund is an investment vehicle that pools a number of investors who have the same financial goal like investing in securities such as stocks, bonds, money market instruments and similar assets. The income earned from these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.
The main advantage of a mutual fund is it gives an opportunity for small investors to access diversified portfolio and professionally managed basket of securities at a relatively low cost.
Different types of Mutual Fund
Depending on the needs such as financial position, risk tolerance and return expectations etc., there are different schemes as mentioned by AMFI.
Based on the option of entry and exit, Mutual Funds are basically of two types, open-ended and close-ended.
In this fund, an investor can invest at any point of time and exit at any point of time. The units are bought and sold directly from the fund.
Here investors cannot invest in fresh units of a fund once the fund is launched. Also, there is no option to exit according to investor convenience. However, to allow an investor to exit from the investment, closed-ended funds are listed on the stock exchange, where they can be traded like stocks. However, at times the units may be thinly traded, which means the counters may not be very liquid. This means exiting a large proportion of units could be a problem.
The other level of segmentation among funds are based on investment objective. The different types are as follows
In this type, an investment is done in fast growing companies which are experiencing robust growth in earnings and revenues. Investment however comes with an amount of risk which investors should be ready to bear. The main objective of growth funds is to achieve capital appreciation by investing in stocks of such growth oriented companies.
Funds with an income focus tend to invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities. Income funds are considered conservative investments as they avoid growth stocks or riskier stocks. These funds are pretty famous for retired individuals who are looking for safe steady cash flows.
Balanced Fund is also called as hybrid fund as it is combination of equity and debt in a 60:40 ratio. This means that 60% of their total investment is in equity and the balance 40% in debt and cash equivalents. It is a mixture of common stock, preferred stock, bonds, and short-term bonds minimising excessive risk.
Money Market Schemes
Money market schemes are also known as liquid funds. These are open ended mutual fund schemes which invest in short term debt instruments such as treasury bills, certificate of deposits and commercial paper. As these are very liquid, they are often used by institutions to park their spare money. They are considered to be the safest amongst all categories of mutual funds.
Other types of schemes include:
Equity linked savings scheme
Equity linked savings scheme( ELSS) are special category in mutual fund which invest in stocks and are eligible for benefit under Section 80C of the Income Tax Act. However, there is lock in period of 3 years and is subject to a ceiling of Rs. 1 Lakh per year, like other tax saving schemes.
Sector specific schemes
The funds that cater to a single sector or theme like infrastructure, bank, FMCG, pharmaceutical etc.
Exchange Traded Funds (ETFs)
These are called so, because they can be traded on a stock exchanges. ETFs are passively managed funds where they will be following an index and their target will be to mirror the index in performance.
As the name indicates. These funds tend to invest internationally.