Mutual Fund and It’s Types | Khasnis Prime Wealth

 

It is needless to mention that mutual funds have gained immense popularity as an effective investment channel. Taking a peek at the technical definition of a mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities by objectives as disclosed in the offer document.

Mutual funds issue units to the investors per the money invested. This helps in the diversification of investments and reduces the financial risk to some extent. Added to this, the profits and losses are shared by the investors in proportion to their investment. So, let’s take a quick look at the types of mutual funds before you dive into an awesome investment journey. 

 

Here are a few common types of mutual funds popular among investors…

 

1.  Money Market Funds

Money market funds also known as liquid funds predominantly involve short-term fixed-income securities like government bonds, treasury bills, bankers’ acceptances, cash equivalent & certificates of deposits. They’re generally a safer investment than other sorts of mutual funds, but with a lower potential return 

2. Fixed Income Funds 

Fixed income funds buy investments that pay a hard and fast rate of return like government bonds, investment-grade corporate bonds, and high-yield corporate bonds. They aim to possess money coming into the fund daily, mostly through the fund’s interest. High-yield bond funds are generally riskier than funds that hold government and investment-grade bonds.

 

3. Equity funds

As the name suggests, equity mutual funds mean investing in different companies. Here we try to obtain greater returns by investing in various industries with varying market capitalization. Equity funds are always in demand because they offer higher returns than term deposits or debt-based funds. It is to be noted that there is an obviously certain amount of risk involved since their performance is induced from market conditions. 

 

4. Balanced Mutual Funds

These funds are a mixture of equities and income securities. They struggle to balance the aim of achieving higher returns against the danger of losing money. They tend to possess more risk than fixed-income funds, but less risk than pure equity funds. Aggressive funds are known to hold more equities and fewer bonds, while conservative funds hold fewer equities as compared to bonds.

 

5. Index Funds

Index funds track the performance of a selected index like Nifty 50 index fund, Index fund, etc. The worth of the open-end fund fluctuates because the index usually goes up or down. Index funds typically have lower costs than actively managed mutual funds because the portfolio manager doesn’t need to do the maximum amount of research or make as many investment decisions.

 

6. ELSS Funds

Also called Equity Linked Saving Schemes (ELSS). These funds are invested in equities and offer tax benefits to investors. These types of schemes have a 3 year lock-in period. The investments in the scheme are eligible for tax deduction u/s 80C of the Income-Tax Act, 1961.

 

ACTIVE VS PASSIVE MANAGEMENT

 

Active management means the portfolio manager buys and sells investments, attempting to outperform the return of the general market or another identified benchmark. Passive management involves buying a portfolio of securities designed to trace the performance of a benchmark index. The fund’s holdings are only adjusted if there’s an adjustment within the components of the index.

 

6. Specialty Funds

These funds involve specialized mandates like land, commodities, or socially responsible investing. For instance, a socially responsible fund may invest in companies that support environmental stewardship, human rights, and variety, and should avoid companies involved in alcohol, tobacco, gambling, weapons, and therefore the military.

 

7. Fund-of-Funds

These funds invest in other funds almost like balanced funds, they struggle to form asset allocation and diversification easier for the investor. The MER ( Management Expense Ratio)  for fund-of-funds tends to be above stand-alone mutual funds.

 

Knowing the types of mutual funds, the next step is to understand which fund is suitable for one and how to diversify one’s portfolio. While thorough self-analysis is recommended, expert guidance ensures optimum return on investments. For the same purpose, a mutual fund advisor comes to the rescue.

Khasnis Prime Wealth guides you through the entire process by understanding and analyzing your financial capabilities.