The Basics Of Mutual Funds
To Invest in Mutual Fund one should know the types of Mutual Fund Available in the market. These are: Equity funds, Debt funds, Balanced schemes, Sector funds, Gilt funds, Index funds, MIPs(Monthly Income Plans), MMFs(Money Market Funds) ETFs etc. Each one of these schemes follows a different investment strategy. Most of the schemes have “growth oriented” or “dividend oriented” plans, which either re-invest or pay out the dividend collected from underlying stocks.
A type of fund characterized by high risk but high returns are called Equity Schemes. Overall, equities has been the foremost performing asset class, thus forecasting high returns. According to market requirements, there are several types of equity schemes on offer. Mid and small cap funds, though risky given the smaller size of the company, are capable of high returns if the company grows manifold. Large cap or blue chip funds invest in large companies resulting in reasonable returns given the relatively low risk. Yet another type of equity scheme is the index fund, where investments are made only in stocks that form the market index of any given index. The riskiest of all equity schemes is the sector fund. As the name suggests, they invest only in specific sectors. Typically, the strategy is to ride the stuck while it grows and manage to exit before it falls. Obviously, timing is the key, hence the risk.
Securities invested in instruments such as bonds, debentures, government securities and commercial paper are called Debt Schemes. This type of fund relies on instruments that yield interest based on a range of market variables. These variables include rupee depreciation and fiscal deficit, lending it a certain degree of volatility. Depending on the time period they apply to, there are short, medium and long term debt funds.Money market funds, also called Liquid Funds, are low risk, and offer instant liquidity. Generally invested in short term securities of a maturity of less than a year, the objective is to maintain the original principle while making a medium return.Gilt funds invest only in government securities and treasury bills. They are better suited for investment on a longer term. An addition to normal long term investments are the money income plans, which make use of a small percentage of money to bolster the scheme’s return.
Hybrid Schemes: This kind of a scheme adopts the principles of both debt and equity schemes. The aim is to reduce the amount of risk that the investor is taking and increase the profit potential at the same time. This type of a scheme usually gives a reasonable amount of return to the investor that is acceptable to the type of investor who invests in this kind of a fund based on their expectations.
Funds of funds, as their name suggests, are funds that invest in other funds depending on market factors.
Exchange Traded Funds (ETFs): These are the funds that are traded on the market like regular stocks. You don’t need to pay Exit load to trade them, but you pay brokerage just like regular stocks. You can do intraday trading with ETFs, which is not possible with regular funds. There are ETFs that are based on Nifty (index), Gold and so on. Generally speaking, they are suitable for short term traders who want to take a position in the market using underlying security.
Chaitanya is from India, and he is part of Moneyvidya.com, where you can find stock tips by proven experts with a transparent track record. Moneyvidya has been integrated to both BSE and NSE, so you can find NSE tips as well as BSE trading tips here.
