Mutual Funds are pool of money collected from investors. The collected money will be invested in the markets such as equity, debt, money market, etc. Mutual Funds are managed by professionally qualified fund managers, the professionalism and experience of the fund manager will help you in generating huge returns out of the investment. There are different types of Mutual Funds in the market such as Stocks funds, Bonds funds, Money market funds, Balanced fund, Asset allocation funds, etc. Again these funds have sub category. Selecting the best one that suits your need is very important. This article is designed in such a way to make you understand about all types of mutual funds. So that you will be able to chose the best one.
Advantages of Mutual funds
Below given are the major advantages of investing in Mutual Funds
- Professional Management
- Greater convenience
- High liquidity of Fund
- Minimum Initial Investment
Types of Mutual Funds
Mutual funds fall into the following major categories;
- Stocks funds
- Bonds funds
- Money market funds
- Balanced fund
- Asset allocation funds
As the name implies, stock mutual funds invest mainly in stocks. These stocks may be sold on the Stock exchanges. Unlike bond funds the very objective of stock funds are long-term capital appreciation. In bond funds, major income is generated from interest/dividend. However, stock funds may generate modest dividends from the stocks in the portfolio and from short-term cash investments but major part of income is from capital appreciation. Meaning of capital appreciation is very simple, the value increase/ price increase in the invested stock is called capital appreciation.
Types of Stock Funds
There are five basic types of stock funds they are;
1. Large Cap
2. Mid Cap
3. Small Cap
Large Cap Funds
Large Cap Mutual Funds are primarily invests in "Blue-chip" companies (large companies). It means well-known industrials, utilities, technology, and financial services companies with large market capitalization. Large cap stocks are perceived to be less risky than small and mid cap companies.
Mid Cap Funds
Mid Cap Mutual Funds are primarily invests in companies with relatively small market capitalization. The market capitalization of companies where mid cap mutual funds are investing will be smaller than large cap and larger than Small cap companies. Mid caps are generally considered more risky than large cap stocks but have a higher return potential.
Small Cap Funds
Small Cap companies are primarily invests in emerging/budding companies. Small caps are generally considered as the riskiest fund compared to other two types of funds but it carries the expectation of higher returns. Small cap funds are subject to greater volatility than those in other asset categories.
International funds are primarily invests in stocks traded on foreign exchanges but purchased in India by Indian fund management companies. Apart from the basic risks, international funds are subject to additional risks such as currency fluctuation, political instability and the potential for illiquid markets.
Sector Funds are investing primarily in specific industry sectors such as technology, financials, health, energy, etc. Sector funds focus their investments on companies involved in a specific industry sector. Sector Funds involve a greater degree of risk as it doesn’t diversify the portfolio.
Bond funds invest in various types of bonds - issued by corporations, municipalities, and the government of India. Bond mutual funds are designed mostly to provide investors with a steady stream of income versus.
Types of Bond Funds
There are three basic types of bond funds.
Government bond funds
Government bond funds primarily invest in bonds issued by the government of India. Investing in Government bond funds will be safe compared to any other funds because India Government is the authority issuing the bonds. These funds provide relatively decent returns.
Municipal bond funds
Municipal bond funds invest primarily in municipal bonds issued by state and local governments and their agencies to fund projects such as schools, streets, highways, hospitals, bridges, etc. Municipal bonds can be insured or non-insured securities.
Corporate bond funds
Corporate bond funds are those funds in which the invest I made in bonds issued by corporates to fund their business activities. These funds are relatively more risky than other two forms of funds and also offer an opportunity to earn greater returns.
Money market funds
Money market funds invest in short-term securities such as Treasury bills. Most money market funds offer a higher rate of interest than bank savings accounts, and some are free of tax. Money market mutual funds are designed to be steadier than stock and bond funds. They are designed in such a way to provide steady income (dividend) on the investment amount, even though the yield may fluctuate daily.
Types of Money market Funds
There are two major types of Money market funds such as;
Taxable Money market Funds are primarily investing in short-term obligations from corporations. The returns from these funds will be free from tax.
Tax-free Money market Funds are primarily investing in short-term obligations from government entities. Returns from these funds are free from tax.
Balanced Funds invest in stocks, bonds, and cash investments, in varying proportions. It produce dividend and capital gain distributions and share price appreciation in proportion to their allocation among the three major asset classes.
Asset Allocation Funds
In an asset allocation fund, the manager will diversify the assets among each category such as cash, stocks and bonds, and weight them according to the portfolio strategy. The manager will redistribute the weightings according to market conditions. Portfolio strategies generally differ according to risk tolerance such as;
- Aggressive Growth Strategy Portfolio
- Growth Strategy Portfolio
- Growth and Income Strategy Portfolio
- Income Strategy Portfolio
Asset allocation funds are generally made up of a mixture of other mutual funds within the same fund family. As market conditions change, the manager has the discretion to lessen exposure in one fund and increase it in another.