Mutual Funds: A look at different types of investment options
It’s not an easy task to grow your wealth with individual stocks. It requires extensive research, with a high amount of risk attached to it. This is where mutual funds come into the picture.
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They allow you to pool your money with other investors in the market to buy stocks and other securities. Since mutual funds usually involve a wide range of asset types, they can diversify your portfolio and hence reduce the risk with lower costs.
In recent times, mutual funds have become a powerful investment tool for many, thanks to their potential for diversification as well as their flexibility.
However, a question that keeps coming to our minds, especially the newbies, is how to pick the right mutual fund for themselves. Here, we guide you through the different mutual fund options that are available in the market:
According to the Association of Mutual Funds in India (AMFI), mutual funds can be broadly classified into the following categories:
Organisation Structure (open-ended, close-ended and interval)
Perpetual in nature, the open-ended mutual fund schemes are open for subscription and re-purchase continuously at the current net asset value (NAV) across all business days. While the close-ended schemes have a fixed maturity date, the units here are issued during the initial offer and can only be redeemed on maturity.
In the interval schemes, purchase and redemption are allowed during a specified transaction period, which is typically for a minimum of two days. It must be noted that at least a 15-day gap is maintained between two transaction periods.
Portfolio Management
This is divided into active and passive funds.
Active Funds: The ‘Active’ fund manager decides whether to buy or sell stock selection. To manage the portfolio, they adopt several key strategies that make them well-suited for investors planning to take advantage of fund managers’ alpha generation potential.
The risk and return here depend on the strategy adopted.
Passive Funds: Contrary to active funds, this one holds a portfolio, which goes on to replicate a stated index or benchmark, such as Index Funds or Exchange Traded Funds (ETFs).
Here, the fund manager has a passive role, since the stock selection as well as the buy or sell decision is driven by the Benchmark Index.
Investment Objectives
Growth funds: Designed to provide capital appreciation, growth funds usually invest in growth-oriented assets like equity, requiring a medium to long-term investment horizon. It must be noted that growth funds returns tend to be volatile over short-term period because prices of underlying equity shares might change.
Income funds: These are opted to get a regular and steady income. Here, money is invested in fixed-income securities like corporate bonds and government securities. The return depends on the interest income earned on these investments along with capital gains from any change in security value.
Liquidity: The option is especially for those hoping for liquidity and principal protection along with commensurate returns.
Investment Portfolio
Depending on their portfolio composition, the mutual funds can be classified into:
First, based on asset class, the fund invests in debt, equity, money market or gold.
Second, on strategies used to create the portfolio like income fund, infrastructure fund as well as the highly popular large-cap or mid-cap or small-cap equity fund.