Mutual Funds – An Introduction to the Types of Mutual Funds


A mutual fund is a trust managed by the fund manager that pools the savings of thousands of investors with similar financial goals. The money collected is then invested in capital market instruments such as stocks or bonds, or a combination of both.

Investing in mutual funds is done by providing different types of investment options which are made available to investors. These generally fall into the following categories: SIP (Systematic Investment Plan), one-off payment, annual, semi-annual and quarterly payments. SIP was basically introduced to average the cost of the investment by purchasing a number of units at regular intervals regardless of how the market moves. This reduces the volatility of the fund. So if the price of the security goes down, more units are bought and if the price of the securities goes up, less units are bought.

To invest in mutual funds, one needs to know the types of mutual funds available in the market. These are: equity funds, debt funds, balanced plans, sector funds, golden funds, index funds, MIPs (Monthly Income Plans), MMFs (Money Market Funds) ETF, etc. . Each of these plans follows a different investment strategy. Most plans have "growth-oriented" or "dividend-oriented" plans, which reinvest or pay out the dividend collected on the underlying stocks.

Equity Schemes: this type of fund invests mainly in shares of companies. It provides returns in the form of capital appreciation. This type of fund is exposed to high risk and therefore the returns may fluctuate. Since it only invests in stocks, it is riskier than debt funds. Returns will depend on the performance of the company in which the fund invests. Conversely, however, this fund has a high yield capacity as stocks have historically outperformed all other asset classes. There are several types of fairness diagrams based on different categorization parameters.

1. Large-cap / blue-chip funds – invest in stocks of large companies, typically from the BSE 100 index. Generally low risk investment with moderate returns.

2. Mid Cap / Small Cap Funds – Mid cap and small cap funds are generally considered to be riskier because smaller companies have higher business risks. At the same time, they can give multi-bagger returns, as small businesses can multiply if they are successful.

3. Sector funds: These funds are the riskiest among equity funds because they only invest in specific sectors or industries. The performance of sector funds depends on the fortunes of specific sectors or industries. This type of fund maximizes returns by investing in the sector, when the sector is supposed to explode and comes out before it falls. You should only invest in these funds if you truly understand the industry and its trends.

4. Index funds: These funds track a key stock market index like BSE Sensex or NSE S&P CNX Nifty. It will only invest in the stocks which form the market index, according to the individual weighting of the stocks. The idea is to replicate the performance of the benchmark. The performance should ideally be better or at least the same as that of the relevant index. The output load of these regimes is generally lower than that of regular regimes.

Debt Programs: Debt programs invest primarily in income producing instruments such as bonds, debentures, government securities, and commercial paper. This type of fund invests primarily in FD type instruments that pay interest according to various market factors. Its volatility depends on the economy reflected by factors such as the depreciation of the rupee, the budget deficit and inflationary pressures. Generally speaking, the returns from pure debt schemes will be in line with bank FDs. There are short, medium and long term debt funds depending on the time horizon they are targeting.

1. Gilt Fund: This is a subtype of debt fund, which invests only in government securities and treasury bills. They are generally considered to be more secure than corporate bonds and are more suitable for long-term investments.

2. Monthly Income Plans (PMI): This is basically a debt program that invests a marginal amount of money (10% – 25%) in equity to increase the return on the loan. system. This fund will offer a return slightly higher than that of the traditional long-term debt system.

3. Money Market Funds (MMFs): They are also called liquid funds. These funds are debt systems that invest in certificates of deposit (CD), interbank calls, commercial paper and short-term securities with a maturity horizon of less than 1 year. The objective of the fund is to preserve capital while producing a moderate return. This is a low risk, low return investment that offers instant liquidity.

Balanced Systems / Hybrid Systems: This system invests in both stocks and income producing instruments in a proportion that balances the portfolio. The aim is to reduce the risk of investing in stocks by also having a stake in the debt market. It generally gives a reasonable return with moderate risk exposure. There may be more equity oriented hybrid funds (60-70% equity) and there may be debt oriented hybrid funds (60-70% debt).

Fund of funds: The fund of funds is a secondary fund that invests in different types of funds depending on market conditions. For example. if the stock markets are in a bearish mood, it may be safe to invest in debt and not in stocks. This type of fund will therefore sell its shares and buy debt fund units from the same fund house. "Asset Allocation Fund" is also a term used to refer to those types of funds that take a macro call and invest in stocks, debt, gold, or some other security.

Exchange Traded Funds (ETF): These are funds that are traded in the market like common stocks. You don't need to pay an exit charge to trade them, but you pay the brokerage like common stocks. You can do intraday trading with ETFs, which is not possible with regular funds. There are ETFs based on Nifty (index), Gold, etc. Generally speaking, they are suitable for short term traders who wish to take a position in the market using an underlying security.


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