MUTUAL FUNDS

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These are the funds, where our money is invested in not one company but in a bunch of them. Usually, a fund manager manages your Mutual Fund and there are various types of mutual funds available for investment.

Funds managed by Experts.

Actively Manged Mutual Funds. Experts monitor Mutual Funds on daily basis.

Passively Managed. Also known as Index Funds. We invest these in a programme and are not monitored on a daily basis.

Types of Mutual Funds based on Asset Class.

Equity Funds

Debt Funds

Hybrid Funds

EQUITY FUNDS

These are the funds that invest in Stocks. Basically, on the basis of the Market Capitalization of fund managed by the Fund Manager these are of three types i.e. Large Cap (>10k Crore), Mid Cap (5-10k Crore) & Small Cap (<5k Crore). Some salient features to be known before investing the mutual funds are

Large Cap – these invest in well est coys, hence the risk is less but already successful so the growth chances are limited too.

Other types of Equity Funds are :-

Sector Fund . It invest only in particular sector of stocks say pharma, Finance and Energy etc. Investing in these includes extreme risk and extreme returns too. It is so because when the market pertaining to a particular sector falls it will inevitably effect all the companies in that sector as well.

Diversified Equity Funds. These funds invest in various sectors and thus re said to be diversified. These are less risky and have comparatively less returns too.

Dividend Yield Scheme. Invest in those companies that are stable, safe and give regular dividend and are less volatile. These are the schemes which generally give returns in short term and on regular basis. The return may be monthly, weekly, quarterly or yearly. Interest earned is not reinvested. As compared to other funds returns are less.

ELSS. Equity Linked Super Saver. These are the funds which benefit the buyer by helping to save taxes under Income Tax Act. The only riding factor being that the investment is min for 3 years. The fund invests min 80% of the money in Equities. No tax is levied on long term capital gain.

Thematic Fund. It invest in various government themes. Comparatively safe.

DEBT FUNDS

These are the funds in which the government or the companies borrow money and return it with interest. Debt Fund companies invest in Government Securities. Various types can be:-

Gilt Fund. It only invests in Government securities and default rate is presumably nil.

Junk Bond Schemes. These have high default risk and yield high return too.

Fixed Maturity Plans. Like bank FDs, these have specific predefined maturity. Money invested in certificate of deposits, commercial Papers & Corporate Bonds. Returns are generally higher than Bank FDs.

Liquid Schemes. These are the Debt Funds that invest in Money Market instruments. Like the companies that borrow money from investors for short term. Invested in short term maturity instruments like Certificate of Deposit, Treasury Bills, Commercial Papers and Term Deposits etc. These give more returns than Savings Acct, are less risky and less volatile. Hence, good for Short Term Investments.

HYBRID FUNDS

These are the funds that invest in Debt Funds and Equity Funds both. These are basically of 3 types:

Monthly Income Plan. Debt Instruments receive 60-90% of invested money. Remaining money is invested in equity. Therefore, it is comparatively safer than Equity.

Balanced Fund. 65-85% in Equity and rest in Debt Instruments.

Arbitrage Funds. It is typical case when a company has difference in price at cash market and derivative market. This fund takes benefit from the difference. more than 65% of the fund is invested in Equity. Invested money is safe.

Types of Mutual Funds based on Structure.

Open Ended Funds. Owner can buy or sell the units anytime. Great deal of Flexibility is available but the return would be comparatively lower.

Closed Ended Funds. These are the funds wherein the purchase can only be done in NFO (New Fund Offer). Then the fund is locked till maturity and even if listed in stock exchange, the liquidity is less.

SIP or Mutual Fund.

Asking this question would be irrelevant as SIPs are a method of investment in the Mutual Funds. Your money is invested every month in Systematic Investment Plan (SIP) . In smaller quantity and in a diversified portfolio. The decision as to where to invest remains with the Fund Manager.

SIP is always a better option to invest due to the following reasons: –

Fund Manager actively manages money.

We invest small amount of money at a time. It minimizes Risk Factor. In case of a bearish market the risk involved is less due to the small amount invested.

It rides over the power of compounding. Small investments over a period of time work wonders as the Power of Compounding works best in this.

Template to Fund Selection. Having known all the basics to value investing the next step is to select the best Mutual Fund. Well, it all depends on the individual, as risk ability differs from person to person. Say for a young person of age up to 25-26 years of age the risk handling capability would be far greater as he is less likely to have any liability. For a person aged between 27-35 years, the risk handling capability would be moderate and it would differ in the case of individuals aged above 35 years of age as he/she is more likely to have liabilities. The best practice is to have a diversified portfolio which gives you the benefits according to your profile.