Types of Mutual Funds
What is a Mutual Fund?
A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
There are several types of mutual funds available for investment,
though most mutual funds fall into one of four main categories which include
stock funds, money market funds, bond funds, and target-date funds.
Equity funds:
As the name implies, this fund invests principally in equity or
stocks of companies and are also known as stock funds or equity-oriented funds.
Within this group are various subcategories some equity funds are named for the
size of the companies they invest in: small-, mid-, or large-cap. Others are
named by their investment approach: aggressive growth, income-oriented, value,
and others.
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Debt funds:
These funds invest in fixed-income securities such as
government bonds, corporate bonds, and other debt instruments. The fund
portfolio generates interest income, which is passed on to the shareholders.
Balanced funds:
These funds invest in a combination of stocks and
bonds, and aim to provide both capital appreciation and income generation.
Index funds:
These funds track the performance of a specific stock
market index, such as the Nifty 50 or the BSE Sensex. This strategy requires
less research from analysts and advisors, so there are fewer expenses passed on
to shareholders and these funds are often designed with cost-sensitive
investors in mind.
Sector funds:
These funds invest in a specific sector or industry,
such as healthcare, technology, or energy.
Tax-saving funds:
These funds, also known as ELSS (Equity-Linked
Savings Scheme) funds, provide tax benefits under Section 80C of the Income Tax
Act in India.
International funds:
These funds invest in stocks or bonds of
companies based outside of India, giving investors exposure to foreign markets.
Exchange-Traded Funds (ETFs): These are similar to mutual funds, but
trade on stock exchanges like shares, and their prices fluctuate throughout the
day.
Investors should choose a mutual fund based on their investment goals,
risk tolerance, and investment horizon. It is recommended to consult a
financial advisor before investing in mutual funds.
Pros of Mutual Funds investing
- Liquidity
- Diversification
- Minimal investment requirements
- Professional management
- Variety of offerings
Cons of Mutual Funds investing
- High fees, commissions, and other expenses
- Large cash presence in portfolios
- No FDIC coverage
- Difficulty in comparing funds
- Lack of transparency in holdings
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