Demystifying mutual funds: mutual funds 101

Types of mutual fund exist in the market n.Mutual funds are   type of instrument where money is collected from many people in a corpus and is invested in the specified securities as per the mandate of the scheme.Mutual funds can be held both in demat and physical format.

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There are various types of mutual fund

Equity mutual fund 

Debt mutual fund

Hybrid

Gold funds

REITS

for retails investors who are not conversant with markets it is always advisable to start their investing journey with Mutual funds as it is considered safe.

Mutual funds are imparting a very crucial role in educating and hand holding new investors to the securities market.Most of the investors are not finance professionals ,they have their day jobs and whatever they save from their day job they want to invest to get better returns on their investment.With growing popularity of mutual funds ,the general populace has found another avenue from the staid fixed deposits of the bank. The different types of mutual fund has been elaborated further in the article.

The Equity mutual funds have some broad categories and many sub categories.

large cap funds are considered stable and less volatile equity fund as it invests in blue chip and large companies of the market.The returns expectation from this fund is comparatively less than from madcap and small cap funds.

mid cap funds are more volatile than large cap funds .these are invested in companies whose market capitalisation is less than large cap companies but more than small cap companies.The returns expected are more than large cap funds.

Small cap funds are funds investing in small companies of the market.These funds are more volatile and can be equally rewarding.

sectoral funds are funds which invest in specific sectors of the economy .e.g Pharma funds, banking funds, infrastructure funds

situational funds are investing in particular situation of the economy which are defined by the mutual fund company itself.They can invest in companies going for demerger, merger,spinoff

value funds are funds which invests in companies based on value they perceive,generally these companies are low P/E companies and the funds invest in thesis companies which they consider to be undervalued taking into account their fundamentals.

growth funds invests in companies which are primarily focussed on growth and reinvesting their profit for growing fast and bigger.Generally they are high P/E companies.

Thematic funds are kind of sectoral funds but broader in their definition so, instead of banking finance fund will invest in all finance companies like bank, insurance,nbfc.

then there are fixed income funds

bond funds invests in bonds of the companies as per the their risk ratings and returns.government bonds are also one of the investment areas for them.

short term funds there are liquid funds which invests in securities of short duration only.

long term funds invests in bonds, fixed papers of companies with 3 years or more duration for benefit of taxation and better returns than short term funds

targeted funds which invest in specific papers as per the name of the funds like gilt funds.

In hybrid funds there are investments both in equity and bond funds

gold funds are generally exclusive invested in gold.

Reits are for investments in commercial rent yielding properties.

Risk profile of the mutual funds can be classified as below

equity funds generally  carry greater risks than debt funds but this cannot be taken as gospel truth some debt funds can be quite risky as we have understood when companies issuing the bonds themselves went belly up.

returns in mutual funds are not guaranteed but past history shows that it is generally far better than fixed deposits of the banks.Equity funds generate returns in excess of 10-12% over a longer period of time, returns can vary greatly depending on the market situations.Debt funds returns hovers around fixed deposits but more tax efficient so  effective returns are better.

of late it has been observed that its better to invest in index rather than in active mutual funds.USA has seen lot of innovation in this space and is frontrunner with almost 45 % of us equity market controlled by passive funds.

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