About Mutual Funds - I

Normally so many people are very much interested on share trading even though they did't have much knowledge on that. It is understandable that common employees didn't have much time to know more about share trading. For those type of people, Mutual Funds is a correct option to invest in share market.

These mutual funds are maintained by big Fund Houses like SBI, HDFC, SUNDARAM etc., In this mutual funds there are so many types and for each of them there will be a Fund Manager in each Fund House. These fund managers studies the market every day by their own knowledge and strategies, and invests the amount given by us in different shares depending on the type of fund it is. Depending on the fund allocation, they calculate the NAV (Nest Asset Value) for every day. By using that NAV only one used to buy or sell the mutual funds everyday.

For a normal investor, it is very difficult to decide what shares to buy, when to buy and when to sell. By buying a mutual fund, your fund manager manages your money and he decides what to buy, when to buy and when to sell them. Fund manager takes these decisions after doing research on the economy, companies.

According to financial theory, when our investments are spread across different shares, risk will be reduced substantially. For a normal investor it is very difficult to put money in different shares, by mutual funds one can do easily. For example, with a minimum investment of Rs.5000/- one can buy stocks in some of the top companies through a mutual fund which may not be possible to do as an individual investor.

One more advantage with mutual funds is, unlike several other form of savings like the provident fund, national saving scheme (NSC), one can withdraw their money from a mutual fund at any time.

Broadly one can classify the mutual funds into 2 categories:

1. Equity funds
2. Debt funds
3. Balanced funds

Lets discuss deeply into them.

1. Equity funds:

An equity fund is a fund that invests in equities or more commonly known as shares. The structure of the fund may vary different for different schemes and the fund manager's outlook on different stocks. Equity investments are meant for long term. That is why they treated as high risk ones. The equity funds are sub-classified depending upon on their investment objective as follows:

a. Diversified equity funds

Investing the fund amount across different sectors like Real Estate, Oil and Gas, Infrastructure, Telecom, Information Technology, FMCG etc. By diversifying investments the fund minimizes the risk of over concentration in specific sectors. In long term, diversified equity mutual funds have given good results.

b. Mid-cap funds

These are type of funds that invests in mid-sized companies. Most stocks held in a mid-cap funds are firms with established businesses that are still considered developing companies.

c. Sector specific funds

These funds can be defined as those funds that makes investments only in those industries or sectors which specified in the prospectus of the fund. In India usually these type of funds invests in sectors such as power, pharmaceuticals, petroleum, and technology. The amount of return purely depends on the specific sector performance where investments are made. Normally one should be very careful for investing into these type of funds. One should go to invest into these type of funds only after thorough knowledge and investigation. Depending on the sector following type of funds can be there in this:

• Natural resources funds
• Utility funds
• Real estate funds
• Financial funds
• Healthcare funds
• Technology funds
• Communications funds
• Precious metals funds

More information on this can be found at http://www.investopedia.com/articles/mutualfund/08/sector-fund-introduction.asp.

d. Tax saving funds

One important point first to be mentioned here is these type of funds will be last only till march'2012. After that in new tax structure, these funds are removed for the list of tax saving instruments.

For time being these are the perfect tax saving instrument where the invested amount will be locked only for 3 years as compared to any other tax saving instrument. And the returns of the tax saving funds are also very good in present past. Before investing into these type of funds, one should analyze the past performance of the specific funds and then only decide where to invest.

2. Debt funds:

Debt funds are specified type of funds that invests in bonds and debt instruments. Since they invests in debt instruments like government bonds, corporate bonds, debentures etc the returns are nearly guaranteed and at the same time, since they are safe instruments their returns are also only equivalent to bank deposits. In these following type of funds are there:

a. Monthly Income Plans

This type of fund is for people who have a big amount initially, and would like to generate a monthly for them with low risk.

b. Capital Protection Plans

This type of plan is also like a debt instrument but some portion of the amount will be goes to the equity to generate more income from the fund.

c. Gilt Funds

Gilt funds invest in government debts like debt issued by Reserve Bank of India on behalf of the government. They also invests on the securities issued by the state governments. But one can't think as they are safe because the value of the fund can go down when interest rates of the debt go down.

d. Fixed Maturity Plans

Fixed Maturity Plans (FMPs) are just like fixed deposits in the sense that these funds are maximum close ended funds, which saves you from interest rate risk.

e. Liquid Funds

Liquid funds are funds which are used by investors for extremely short time durations, and in most cases instead of a savings account. The current saving account interest is 3.5% per annum where as some liquid funds have returned over 5% per annum. These funds are not meant to keep the money for long durations.

f. Floating Rate Funds

Floating rate funds are funds that invest in mainly in floating rate debt instruments, and can invest in government and corporate securities.

3. Balanced funds:

Balanced funds are funds which invests in stocks, money markets and bonds. The purpose of balanced funds is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income).

Till now I have covered the type of mutual funds exists in the market. In future blog I try to write more about the options available in a specific mutual fund (like growth, dividend and divedend reinvestment options).

Comments will be appreciated.

References:
http://www.valueresearchonline.com
http://www.mutualfundsindia.com
http://www.investopedia.com
http://www.onemint.com