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An Overview Of Types Of Mutual Funds For Beginners
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When you think about investments, the investor has to research and choose from an array of options. You have to figure if you want to invest in stocks, bonds, money market securities, or opt for the traditional method by plotting the funds in fixed deposits, public provident funds (PPF), or combine the new and old ways.
No matter which investment you go for, each has its pros and cons. Choose the one that suits your needs. Beginners have a tough time understanding the mutual fund's concept well. The first question is obviously why invest in mutual funds? Then comes what types of mutual funds are available in the Indian market.
Types of mutual funds in India have their sub-types as well. Hence, it is essential to learn about them as well. Each carries different risk levels and offer separate returns. Before understanding the types in detail, let us define mutual funds.
Mutual funds meaning:
It is a pool of investment from a group of investors professionally managed by different investors. They invest in diverse securities to achieve a common objective. If you hold a diversified mutual fund, you keep the losses at bay. Mutual funds investment requires being vigilant about the market and keeping an eye on the performance of the assets.
Investors gain access to units of the desired scheme based on the Net Asset Value (NAV) of the units determined daily. The gains are then proportionally distributed amongst the investors by the fund manager. Investors keep track of the NAV to gauge the performance of different securities and funds.
Mutual funds are classified based on investment asset class:
1) Equities: They represent the largest category of mutual funds. They primarily invest in the equity market. There are types of equity funds as well –
• Large-cap: These funds invest in reputed organisations. Since the stock prices are less volatile, they carry a lower risk
• Medium and small-cap: These funds invest in an uncertain market. If the economy grows, they earn better returns. However, they are riskier than large-cap funds
• Sectoral funds: These funds invest in specific sectors such as FMCG, infrastructure, etc. They are most perilous in the portfolio as the funds concentrate only on one sector
2) Fixed income (bonds): They focus on the bond market such as debentures, Government securities, etc. Bonds follow a simple concept – borrowing to large corporations.
3) Money market funds: They are those funds that invest in short-term debt-related instruments like Treasury bills, commercial papers, etc. They are low-risk by nature and offer lower returns.
The other types of mutual funds include:
1) Index funds: These funds invest in stocks that comprise an index such as BSE Sensex and Nifty. The proportion of investment is the same in all. They follow the passive investment strategy because these funds do not involve active stock selection.
2) Quant funds: Such funds use quantitative methods to select stocks rather than researching the underlying business of the company. They are further classified as:
• Close-ended funds: Here the investor can enter only when the scheme gets announced. It matures when the policy ends. Hence, they carry a fixed duration which is between 3 to 15 years. They are traded like any other stock when listed on an exchange
• Open-ended funds: It is a fund that is available for subscription throughout the year. Here the investors can enter and exit as per convenience
Swarali Chavan is a finance professor who loves study about market investment instruments. She has written on types of mutual funds. Through this article, she has listed the different types of funds
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