A Mutual Fund is essentially a professionally managed investment scheme, run by an asset management company that brings together a set of people to pool their money and invest in stocks, bonds and other securities.
Mutual Funds are the preferred mode of investment for a growing segment of the Indian Populace. These funds provide an avenue for people with close to no investment knowledge, to participate in the Indian growth story.
There are essentially 7 broad types of mutual funds:
- Money Market Funds:: These are mutual funds which invest in fixed income instruments like government bonds, treasury bills, commercial papers (CP's) and certificates of deposit (CD's). The safety associated with Money Market Funds is generally high. However, the associated return potential is lower than other types of mutual funds.
- Fixed Income Funds:: These mutual funds invest in instruments providing a fixed rate of return like government bonds, investment grade corporate bonds etc. These funds are designed to have regular money coming in through the interest earned on the investments.
- Equity Oriented:: These funds invest in equities with a goal of achieving higher capital appreciation. These are generally riskier than fixed income and money market funds. Equity funds have different flavours with various implementations like largecap, midcap, smallcap and diversified types.
- Balanced Funds:: These funds invest in a combination of equity and debt instruments. They try to achieve higher capital appreciation with a lower risk of capital loss. The risk associated with these funds is lower than equity funds but higher than fixed income/money market funds. Aggresive funds have a lower debt allocation with a higher percentage in equity whereas conservative funds target a higher debt allocation.
- Index Funds:: Index Funds are designed to track a specific index for eg. Nifty. These generally are long term, low risk instruments and are constructed so as to mimic the movement of an index. Being passively managed these have lower costs associated than actively managed funds.
- Specialty Funds:: Speciality funds generally invest in special instruments like real-estate, commodities etc.
- Fund-of-Funds:: These funds generally invest in other funds. These provide investors with an option to diversify their investments and asset-allocation.
This concludes our discussion of mutual funds and its various types. If you have any doubts on any topics related to mutual funds, please let us know in the comments section below.
Happy Investing !!!!!
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