Investment in the share market always includes risk what if you do not want to take risk and hassles associated with selecting stocks to invest for better returns. Mutual fund investment is for you. Mutual funds are managed by professional money managers and give access to the individual investors to invest in the funds.
What is a Mutual Fund?
A mutual fund is a type of investment which pools money from investors to invest the money into the different type of assets like stocks bonds and money markets and the profit made by investment is distributed proportionality amongst the investors. There are various kinds of mutual funds that can be categorized into two categories.
1. Scheme Type 2. By invested asset type
1. Scheme type: There are two types of mutual fund schemes that exist.
(I). Open-ended (II). Close-ended
Open-ended: In this scheme, funds can be purchased and redeemed at any time that's mean you have the freedom to buy the fund at any time and sell them whenever you want. That's why this is ‘Open'.
Close-ended: In this scheme, funds are open for subscription for a limited period of time that's mean an investor cannot buy after a specific time decided by fund house, that's why this is "closed".
2. By invested asset type: There are various type of assets where mutual funds invest their corpus, Some of them are explained below:
Equity: An equity fund is a mutual fund that largely invests in stock/shares of companies decided by its fund manager. This is also called stock or Growth fund.
There is two type of investment done in equity mutual fund actively and passively.
Actively means when a professional fund manager scans the individual stock using technical and fundamental analysis and chose the quality stock into the fund's portfolio and invest wisely to gain maximum returns.
Passively means when a fund manager directly invests it into the index like Sensex, nifty 50 and S&P bank nifty.
Further, it can be categorized into a different type of equity fund as per the size of the company in its portfolio holdings and the size of an equity fund is decided by a market capitalization.
Large Cap Funds: Large-cap funds are those funds where a large portion of their corpus invests in large-cap stocks. Large-cap stocks are also known as blue-chip stock, they have large market capitalization. Large-cap funds are also known for its justifiable returns.
Mid Cap: Mid-cap funds are those funds which invest their corpus into the mid-cap stocks that look for investment opportunity for their expansions that's why these stocks are highly volatile than large-cap stocks. The mid-cap fund may provide the higher return than large-cap fund because of its high volatile in nature also include high risk.
Small cap funds: Small-cap funds are those fund which invests their corpus in small-cap stocks They are very small companies in terms of market capitalization as they are the young company in the market they are very aggressive for their expansion so there is the high possibility for high returns. Small cap companies are more volatile than large and mid-cap companies and they are riskier too than large and mid-cap stocks. The investor who possesses the high-risk capacity may look invest in small-cap funds.
Multi-Cap Funds: Multi-Cap funds are those fund which diversifies investment between mid and small cap companies. Multi-Cap mutual fund holding is the combination of small and mid-cap stocks as both the segment are highly volatile due to their exposure in high beta stock they work on high risk and high gain platform.
Sectoral: As its name suggests sectoral funds are those funds which invest their corpus into a single industry or sector. For example invest in pharmaceuticals, Real-estate, Aviation etc.
There is a possibility to get the high return if that sector performs well but due to lack of its diversification investment on these funds are very risky.
Debt Funds: A debt fund is a mutual fund that invests only in government bonds, securities debentures, and other fixed-income instruments. Debts fund are very secure to invest and these mutual funds provide the fixed return to the investor.
Hybrid Funds: Hybrid funds are the combination of equity and debt funds. In this scheme, funds are equally invested in debt and equity funds to minimize the risk with high gain opportunity.
Gilt funds: These are funds that invest entirely only in government securities (or gilts, for short) and try to benefit from changes in bond prices as interest rates change. There can be both short-term and long-term gilt funds. These funds are akin to sector funds in equities – they require careful watching and timed entries and exits and are thus the highest-risk category of debt funds.
Money Market Funds: Funds which invest their corpus in liquid assets like T-Bills, CPs etc. This is also very safe to invest and best suited who want the quick return from their investment.
How to invest in Mutual funds: By now you should be familiar with the types of mutual funds and the risk associated with each fund. So now you can decide in which fund you have to invest in as per your investment style and risk taking capacity. Once you decide the funds to invest you have two ways to invest either you can invest a lump sum amount or invest a certain amount monthly. Investment on monthly basis known as SIP (Systemic Investment Plan).
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