A mutual fund is a professionally-managed investment that offers diversity, liquidity and convenience. Each mutual fund is made up of individual stocks, bonds, or money market securities. Because a mutual fund pools the money of many individuals, it has the buying power to invest in hundreds of different securities at once. In exchange for your money invested in a mutual fund, the fund gives you units in the fund that represent your participation in the fund.
Types of Funds
Funds can have different investment objectives such as long-term growth, high current income or stability of principal. Depending upon its objective, a fund might invest in cash investments, bonds or equities, or in some cases a combination of these.
Equity funds: Invest in common shares of companies.
Bond or Debt funds: Invest in the fixed income securities of companies or the Government of India.
Money market funds: Hold cash investments like short-term commercial paper issued by companies.
Other terms that describe types of funds are:
Ratio between Debt and Equity Securities
Balanced funds: Typically, such funds invest in a combination of debt and equity securities, such that they can provide the stability of principal and income of debt investments, but also the growth and capital appreciation of equity securities. Usually, debt is 35% and equity is 65% of the portfolio, but that can change depending upon market conditions
Funds based on Size of the Companies Invested in
Large cap funds:Funds that invest in companies whose total market cap is above Rs40bn
Mid cap funds: Funds that invest in companies whose market cap is between Rs20-40bn
Small cap funds: Funds that invest in companies whose market cap is below Rs20bn
Duration and Liquidity of the Fund
Closed end fund: Usually for three or more years. You can buy this fund only during the NFO period and these cannot be freely bought or sold thereafter. Sometimes, close end fund can convert into open end funds after the initial period of three to five years.
Open end fund: Unlike closed end funds, these can be bought and sold freely and they do not have any limitation on the holding period.
Dividend or Growth Funds
Dividend funds: These funds provide dividends to unit holders that can serve as a source of regular income to investors. The companies they invest in are companies that pay dividends and these dividends are then passed on to the ultimate unit holders. Investors can choose a dividend reinvestment option where the dividends received are used to buy additional units in the investor's names
Growth funds: Do not have an income option, because often they are invested in companies that do not pay or pay less dividends because they are on a high growth path that need cash to be re-invested in the business itself
Types of Funds
Funds can have different investment objectives such as long-term growth, high current income or stability of principal. Depending upon its objective, a fund might invest in cash investments, bonds or equities, or in some cases a combination of these.
Equity funds: Invest in common shares of companies.
Bond or Debt funds: Invest in the fixed income securities of companies or the Government of India.
Money market funds: Hold cash investments like short-term commercial paper issued by companies.
Other terms that describe types of funds are:
Ratio between Debt and Equity Securities
Balanced funds: Typically, such funds invest in a combination of debt and equity securities, such that they can provide the stability of principal and income of debt investments, but also the growth and capital appreciation of equity securities. Usually, debt is 35% and equity is 65% of the portfolio, but that can change depending upon market conditions
Funds based on Size of the Companies Invested in
Large cap funds:Funds that invest in companies whose total market cap is above Rs40bn
Mid cap funds: Funds that invest in companies whose market cap is between Rs20-40bn
Small cap funds: Funds that invest in companies whose market cap is below Rs20bn
Duration and Liquidity of the Fund
Closed end fund: Usually for three or more years. You can buy this fund only during the NFO period and these cannot be freely bought or sold thereafter. Sometimes, close end fund can convert into open end funds after the initial period of three to five years.
Open end fund: Unlike closed end funds, these can be bought and sold freely and they do not have any limitation on the holding period.
Dividend or Growth Funds
Dividend funds: These funds provide dividends to unit holders that can serve as a source of regular income to investors. The companies they invest in are companies that pay dividends and these dividends are then passed on to the ultimate unit holders. Investors can choose a dividend reinvestment option where the dividends received are used to buy additional units in the investor's names
Growth funds: Do not have an income option, because often they are invested in companies that do not pay or pay less dividends because they are on a high growth path that need cash to be re-invested in the business itself
