MUTUAL FUNDS
MUTUAL FUNDS
Mutual fund is an investment tool, where funds are collected from different interested investors and are invested in securities such as stocks, bonds, money market instruments and such assets.
In India, mutual funds are generally handled by fund managers, also referred to as the portfolio managers. They are responsible for investing the fund’s capital and produce capital gains and income for the fund’s investors. They also maintain a structured portfolio to match the investment objectives.
Mutual funds are a cost-effective way to diversify your portfolio across different asset categories and industry sectors. Instead of buying and monitoring potentially dozens of stocks, you could buy a few mutual funds to achieve broad diversification at a fraction of the cost. The most important benefit of investing in a Mutual Fund is that the investor can redeem the units at any point in time.
THE DIFFERENT TYPES OF MUTUAL FUND SCHEMES
Equity/Growth Funds
If you are investing in equity growth funds, then you are largely putting your money in stocks. The main objective of these funds is to achieve long-term capital growth. Equity funds invest at least 65% of their corpus in equity and equity-related securities. These funds may invest in a wide range of industries/sectors or focus on one or more sectors. These funds are suitable to invest in if you have a higher risk appetite and you have a long-term financial goal.
Debt/Income Funds
Following a simpler approach, debt/income funds usually invest 65% of the amount in fixed income securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds are likely to be less volatile than equity funds..
Balanced Funds
With an aim to provide stability of returns and capital appreciation, balanced mutual funds invest in both equities and fixed income instruments. These funds generally tend to invest around 60% in equity and 40% in debt instruments such as bonds and debentures.
Money Market/Liquid Funds
If you are looking for a fund that offers liquidity and capital preservation with moderate income, then this is a suitable choice. Money market/liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for less than 91 days. These funds are ideal to invest in if you are a corporate or an individual investor and wish to earn moderate returns on surplus funds.
Gilt Fund
Gilt mutual funds invest exclusively in government securities. The Gilt funds do not carry a credit risk – where the issuer of the security can default. However, it comes with an interest rate risk i.e. risk due to the rise or fall in interest rates.
Other Funds
Tax Saving (Equity Linked Savings Schemes/ELSS) Funds The Income Tax Act offers tax deduction under specific provisions of the Income Tax Act, 1961. Designed to generate capital growth, ELSS mutual funds invest primarily in equities and largely suit investors with a higher risk appetite for capital appreciation. Spread over medium to long-term, tax saving funds comes with a lock-in period of 3 years.
Index Funds
Index funds are attached to a particular index such as the BSE SENSEX or the S&P CNX NIFTY. Their performance is linked to the results of that index. Here, the portfolio comprises stocks that represent an index and the weightage assigned to each stock is in line with the identified index. Hence, the returns will be more or less similar to those generated by the Index.
Sector-specific Funds
Sector-specific funds invest in the securities of a specific sector or industry such as FMCG, Pharmaceuticals, IT, etc. The returns on these funds are directed by the performance of the respective sector/industries. Sector funds allow an investor to diversify funds across multiple companies within an industry. These funds tend to be riskier as the performance is directly linked to that of the overall sector.
