What is a Mutual Funds and Different Types of Mutual Funds with Examples


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Mutual Funds Definition:

Mutual Funds are the funds created with the mutual requirement needs of the Investor. It is a basket created with varieties of investment options. similar to basket of shares, bonds, money market or a mixture of all instruments or a basket of shares based on sectors like Bank, IT, Infrastructure, FMCG, etc or basket of diversified shares.

In other words, you have a rough idea where you want to invest your money (for example: shares, sector shares, bonds, money market, etc) but you are not aware of the markets, trend, entry exit criteria, stop loss much and what companies to invest; then mutual funds fit to your requirement. It is much likely as you go to real estate consultant to assist you in your real estate investment needs. Here every mutual funds are managed by financial expert knows as Fund Manager which handles your investment based on your selected mutual funds.


Types of Mutual Funds:

Well in India, Mutual Funds are categorized based on various fundamentals. Funds to be fond of:


Equity Mutual Fund will invest your money in the stock markets. In plain english it belongs to stock mutual fund where returns on investments are purely based on stock performance. These funds are off the record best type of mutual fund in long run.


Debt Mutual Funds will invest your money in debt instruments like Treasury bills, Government Bonds, etc. These investments ensure you fixed rate of returns.


Balanced Mutual Funds will invest your money partially into equities and partially into debts. Investor prefers this sort of investment when they want to minimize the equity investment risk.


Sectorial Funds will invest you money as per your selected sector like IT, Banks, FMCG, Pharmacy, etc. Fund Manager control stocks trading based on your selected sectors preferences. Returns on investments are based on stock performance belonging from the specific sector.


ELSS or Equity Linked Savings Schemes are commonly known as Tax saving funds, Investment made towards ELSS funds are exempted from Income tax under section 80 C. However, ELSS funds have 3 years of lock-in period.


Open Ended Funds are funds that allow you to invest money and redeem anytime as per your needs and your strategies regardless of any time circumstances.


Close ended Funds are funds allowing you to invest with some lock-in period, mostly within 1 to 3 years, before that you cannot redeem the fund since there is a time constraint involved with it.


Wiki Finance pedia - e-learning course on Investing Wikipedia Chapter - Types of Mutual FundsWho regulates Mutual Funds in India?

Mutual funds are regulated by Securities and Exchange Board of India (SEBI) and also ensure polices and norms to be followed by fund managers, ensuring that the money which investor invests are safe and health and it doesn’t contain any type of fraudulent activities. SEBI does not guarantee returns on fund for investor, However returns on fund correspond to the market performance. Asset Management Company (AMC) is the one which launches mutual funds, however company can handle investor’s money or they can heir expertise third party as a Asset Management Company to handle investor’s money to get best returns.


What is NAV in Mutual Funds?

Fluctuations of shares are referred by price (Stock Price) whereas in case of mutual funds, they are recognized as a Net Asset Value (NAV) which is used to track your fund’s performance (Mutual Fund NAV or Mutual Fund Prices).


Let us understand with examples of mutual funds how does a mutual fund work:

Portfolio Scenario-1; Example of Mutual Funds:

Assume that we wish to buy SBI Pharma Fund – Growth which belongs from sectorial based growth stock mutual funds. Asset allocation consists of investing 90 to 95 percent into Pharmaceutical stocks and remaining 5 to 10 percent into Cash or Money Market. Let us evaluate on the note when we say Pharmaceutical sector are best in investment returns based on past performance.

Fund Name: SBI Pharma Fund (G)
Fund Family: SBI Mutual Fund
Fund Class: Sector – Pharma & Healthcare
Asset Allocation: 90 – 95% Investment in Pharma Shares
NAV (As on 01-Jun-2009) :26.00
NAV (As on 01-Jun-2015) :134.00
Returns after 6 years :515%
Recommendable Sector :Best performing mutual funds

Conculsion:

Looking at the above table, It is fairly clear that if you invest around Rs.10,00,000/- you can accomplish to get Rs.51,50,000/- after 6 years which can be classified as high yield mutual fund. Equity or Sector based funds are classified as best mutual funds to buy in long run. These type of investments are also categorised as one of the equity investment strategies or retirement investment strategies.


Portfolio Scenario-2; Example of Mutual Funds:

Assume that we wish to buy ICICI Prudential Long Term Plan – Retail Plan (G) which belongs from Debt Funds or Bond Funds. Asset allocation consists of investing 90 to 95 percent into Government Securities Bond and remaining 5 to 10 percent into Cash or Money Market instruments. Let us check the performance of the Bond Mutual Funds based on past returns.

Fund Name: ICICI Prudential Long Term Plan – Retail Plan (G)
Fund Family: ICICI Prudential Mutual Fund
Fund Class: Debt Long Term
Asset Allocation: 90 – 95% Investment in Government Debts
NAV (As on 01-Jun-2009) :19.00
NAV (As on 01-Jun-2015) :32.00
Returns after 6 years :168%
Recommendable Sector :Top last mutual funds to buy

Conculsion:

Looking at the bond past performance returns, It is understandable that investing in bonds around Rs.10,00,000/- can achieve you to take home Rs.16,80,000/- after 6 years which cannot be recommended for long term investing strategies. Since bond funds / fixed income funds are best short term investments for risk free returns. You can additional investigate on online shares investment types of mutual fund websites which can best fit to your requirement needs.

 

  

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