In my earlier post I have given an insight about Mutual Funds (refer to my earlier post Mutual Funds: An Insight) with regard to their management and performance. Now in this post we will look at the various types of Mutual Funds available in the market and the features they offer to the investors.
We look at the Funds with Investment perspective in mind and look at the differences between these funds.
Equity/Growth Funds: The accumulated wealth from the investors are invested in stocks of the Public Companies. Thus the return on the investment is directly linked to the performance of the stocks. These stocks on basis of the capitalization are termed as Large Cap, Mid Cap and Small Cap. The investment in this kind of Funds is a lot risky as it is directly linked to stock market performance. However the potential of earning is also very high in these types of Investments. Here the investments are again diversified to different sectors such as IT, Infrastructure, Pharmaceuticals, Banks etc. This helps to reap the gains of any sector doing well and at the same time negate the effects of ill performing sector. Here the selection of stocks for investment is done by the Professional Fund Managers after analyzing their future growth potential.
Income/Debt Funds: These types of investments focus on the current potential to earn rather than in future. It takes care of steady flow of income to the investor. The funds here are invested in companies which offer high dividends and also in debentures, certificate of deposits, commercial paper, bonds and securitized debts. The payment is made to the investor on monthly or quarterly basis and considered to provide Stable Returns. The returns on investment or the interest do tend to fluctuate with the market trends. However these fluctuations remain within specified range and do not bring any adverse effect on the principal. The return is generally higher than other form of regular income. It is a perfect kind of investment of people looking for stable regular income.
Balanced/Hybrid Funds: Investments here are offer a mixture of income along with capital appreciation. It tries to bring balance in the portfolio through diversified investment. Thus this kind of investment not only shields from downturn but also mobilizes fund to better viable options. The combination of investment includes stocks and bonds while some even include Gold. The fund manager chalk out the balance of the fund with respect to the allocation to be made in stocks, bonds and gold. At the time when the market is not doing too well these are the perfect form of investments as they provide better return and growth for the investment. In India, it has been observed that the over a long time they do provide decent return on investment. The investments in these funds are of three types: Monthly Income Plans, Capital Protection Fund and Asset Allocation Funds. The investor can chose from them based on market scenario.
Sector/Sector Specific Funds: Here the Fund Managers target a single sector for the purpose of investment. The reason behind this is that the study has shown tremendous growth for the companies in the sector which can provide very high returns. Thus the investment is made on the stocks specified by the respective sector only. However since the allocation is made in a specified sector it also carries a lot of risk because the fund is totally dependent on the sector’s performance for growth and return. This kind of investment does not provide diversification of funds so investor should be very careful while investing. But on the other hand, they can also provide great returns and growth too.
Global Funds: These are special types of fund here the diversification of fund is very broad and in the overseas market. Here the Fund Management identifies the location where the allocation of fund is made. It ensures return on the investment when the domestic market is under performing seems vulnerable. Further this kind of investment is closely monitored by the governing for any fraud and laundering which they are prone to. The SEBI has formulated laws to regulate these kinds of investments and ensure transparency.
Exchange Traded Funds (ETFs): These funds do not trade on the stock or bonds but is based on the index representing stocks, commodities, or a sample of assets. The portfolio while buying and selling of stocks replicates the price at which the native index trades. Here the investment is dependent on the Index performance and return is based on it. These types of investments reflect the market sentiments and trend pattern at the given point.
Index Funds: Here the funds are allocated to the index. The performance of the fund is dependent on how the Index pans out over a period of time. Here the cost of investment is quite low and it is very transparent in nature. Here the risk on the investment is quite low and the investors themselves can keep a track of the investment. However compared to ETFs it is a bit more diversified in nature as it may include stocks from wide range of sectors.
Funds of Funds: In this kind of investment the allocation is not directly made into stocks or commodities rather it is invested in the funds which have already invested in stocks, bonds or commodities. Here the diversification of the fund is maximum as it has diversified portfolios of diversified investments. However these are very expensive as it involves complex diversification and management of Investment.
Money Market Funds: These are open ended funds and invest into short term debts instruments. The funds are vested into debts instruments such as the treasury bills. They provide good return on the investment and are for a short duration. The investments in these funds are considered safe and carry minimum amount of risk.