Various types of Mutual Fund schemes exist to meet the needs of various people. There are three kinds of mutual funds.
Equity or Growth Funds
- They invest most of their money in equity, i.e. shares of corporations
- The primary goal is wealth generation or capital appraisal.
- They could generate higher return and are the best long term investments.
- Examples would be
- “Large Cap” funds which invest primarily in businesses which have established large businesses
- ” Mid Cap funds” which invest in mid-sized businesses. Funds that invest in mid-sized businesses.
- Small Cap funds invest in small companies
- “Multi Cap” funds that invest in a mix of small, medium and large sized companies.
- Funds, also known as “Sector” which invest in companies that are closely linked to a certain type of business. For e.g. Technology funds that invest in companies that are based on technology
- Fonds which are “thematic” and invest in a single topic. You can think of the following: Infrastructure funds that invest in companies that will gain from the expansion of the infrastructure sector
- Tax-Saving Funds
Income or Bond or Fixed Income Funds
- They are Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, and so on.
- These investments are safer and suitable for income-generating.
- Examples could be Liquid Funds, Short Term floating rate, Dynamic Bond, Corporate Debt, Gilt Funds, etc.
- These funds invest in both Equities as well as Fixed Income, thus offering the best of bothworlds, Potential for Growth as well as Income Generating.
- Examples would be Aggressive Balanced Funds or Conservative Balanced Funds pension Plans Children Plans and Monthly Income Plans, etc.
How do Mutual Funds help manage risk?
There are many risk factors. For example, if you have a stake in a company, there is the risk of a price or Market Risk or a Specific Risk. The shares of that company may dip or even plummet due to any of the above causes or any combination of these causes. You van visit Mutual Funds Service online.
The Mutual Fund portfolio typically holds several securities. This permits ” diversification“. Diversification is among the most significant benefits to investing in a Mutual Fund. This ensures that portfolio performance will not be affected by a decline in the price of one or fewer securities.
Another significant risk to keep in your mind is Liquidity Risk. What is liquidity? It’s the ease of the conversion of an asset to cash. If an investor owns an investment that is fixed for say 10 years. She wants to cash out in the 3 fourth year. This can be a typical liquidity issue. The main concern at present is access to cash and not the return. Mutual funds, as a result of regulations and structure, offer enormous liquidity. The portfolios are designed to give an investor, ease of investment and redemption.
Also read: Importance of Positioning