Mutual Funds.... WHAT WHY??
This investment vehicle has been gaining popularity lately and a lot of people who never thought beyond post office schemes or bank fixed deposits are coming forward to inquire about the nitty-gritty of mutual fund – how it works , the pros and cons of investing in the schemes in mutual fund etc.
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.
Benefits of Mutual Funds
- Expert money management
- Low Cost
- Convenience
- Diversification
- Systematic investments
- Flexibility
- Liquidity
- Tax Efficient
- Safe & Secure
- Easy to monitor
Types of Mutual Funds
Mutual funds are divided into several kinds of categories, representing the kinds of securities they have targeted for their portfolios and the type of returns they seek.
Equity Funds
Hybrid Funds
Liquid Funds
Equity Mutual Funds
Equity funds aim to generate high returns by investing in the shares of companies of different market capitalization. Within this group is various sub-categories. Some equity funds are named for the size of the companies they invest in like Large Cap, Mid Cap, Multi-cap or Small cap. Others are named by their investment approach: aggressive growth, income-oriented, value, and others. Equity funds are suitable for those who stay invested for a long time and who have a higher risk appetite.
Debt Mutual Funds
Another big group is the debt Fund category. A debt fund invests in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments based on their credit ratings. The basic reason behind investing in debt fund is to earn interest income and capital appreciation.
Debt funds are suitable for people who are risk-averse and looking for both short-term and medium-term investment horizons. Short-term ranges from 3 months to 1 years, while medium term ranges from 3 years to 5 years.
Balanced or Hybrid Funds
Balanced funds invest in both equity and fixed income funds to balance the risks and maintain a certain return rate. Hybrid funds aim to achieve wealth appreciation in the long-run and generate income in the short-run via a balanced portfolio. The fund manager allocates your money in varying proportions in equity and debt based on investment objective of the fund. Budding investors who are eager to take exposure in equity markets can think of hybrid funds as the first step. As these are an ideal blend of equity and debt, the equity component helps to ride the equity wave.
At the same time, the debt component of the fund provides a cushion against extreme market turbulence. In that way, you receive stable returns instead of a total burnout that might be possible in case of pure equity funds.
For the less conservative category of investors, the dynamic asset allocation feature of some hybrid funds becomes a great way to milk the maximum out of market fluctuations.
