5 Types of Mutual Funds

Nutan Gupta

11 May 2017

To put it simply, a pool of money by people with similar risk tolerance, managed by a manager and being invested in a pre-defined financial instrument is known as mutual fund. They do not all necessarily invest in stock market. For example, some mutual funds also invest in gold. One of their advantages is the quick liquidity that they provide. There are various other types of mutual funds. Let us have a glimpse through the various types of mutual funds:

Money Market Funds: Mutual funds that invest in short-term fixed-income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit are known as money market funds. These funds are generally safe; however, their rate of returns is generally lower than those of other funds. These funds are usually open-ended. They are widely considered as safe as bank deposits yet providing a higher yield. Thus, their typical returns are slightly more than what you get with a savings account.

Equity Funds: Equity Funds are funds that invest in stocks. These funds usually grow faster than money market funds. However, the risk involved with these funds is slightly higher as they may be affected by market volatility. It is advisable to invest for long duration in equities. The case is same for equity funds. It is advisable to invest for a long-term even with equity funds. There are various sub-types of equity funds like sector funds, which invest in a particular sector of equities, index funds, which aim to mirror the performance of a particular index, and so on.

Balanced Funds: These funds are basically a hybrid of the above-mentioned two funds. They get you the best of both money market and equity funds. They can be open-ended or interval funds. They tend to negate the effects of the volatile market by investing in fixed-income debt market instruments. Asset allocation fund is a similar type of fund. These funds do not hold a specified percentage of any asset class.

Commodity funds: These are mutual funds that invest neither in money market nor in equities; they invest in commodities. The most common type of commodity fund is Gold Funds. Any commodity fund can be further classified as commodity ETF and commodity sector fund. These funds are usually short-term funds. Commodity funds are essentially a sub-part of specialty fund. The other types of specialty funds are real estate funds, socially responsible investing funds and so on.

Fund of Funds: Funds that invest in other well-performing funds, expecting to mirror their performance, are called fund of funds. They pre-specify the mutual funds that they will buy or the kind of schemes they intend to invest. These are usually open-ended funds.

In a nutshell

Mutual funds, while subject to market risks are very good options when it comes to investing. You get to choose from an array of funds. They have the potential to generate great returns in the long-term.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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5 Types of Mutual Funds

Nutan Gupta

11 May 2017

To put it simply, a pool of money by people with similar risk tolerance, managed by a manager and being invested in a pre-defined financial instrument is known as mutual fund. They do not all necessarily invest in stock market. For example, some mutual funds also invest in gold. One of their advantages is the quick liquidity that they provide. There are various other types of mutual funds. Let us have a glimpse through the various types of mutual funds:

Money Market Funds: Mutual funds that invest in short-term fixed-income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit are known as money market funds. These funds are generally safe; however, their rate of returns is generally lower than those of other funds. These funds are usually open-ended. They are widely considered as safe as bank deposits yet providing a higher yield. Thus, their typical returns are slightly more than what you get with a savings account.

Equity Funds: Equity Funds are funds that invest in stocks. These funds usually grow faster than money market funds. However, the risk involved with these funds is slightly higher as they may be affected by market volatility. It is advisable to invest for long duration in equities. The case is same for equity funds. It is advisable to invest for a long-term even with equity funds. There are various sub-types of equity funds like sector funds, which invest in a particular sector of equities, index funds, which aim to mirror the performance of a particular index, and so on.

Balanced Funds: These funds are basically a hybrid of the above-mentioned two funds. They get you the best of both money market and equity funds. They can be open-ended or interval funds. They tend to negate the effects of the volatile market by investing in fixed-income debt market instruments. Asset allocation fund is a similar type of fund. These funds do not hold a specified percentage of any asset class.

Commodity funds: These are mutual funds that invest neither in money market nor in equities; they invest in commodities. The most common type of commodity fund is Gold Funds. Any commodity fund can be further classified as commodity ETF and commodity sector fund. These funds are usually short-term funds. Commodity funds are essentially a sub-part of specialty fund. The other types of specialty funds are real estate funds, socially responsible investing funds and so on.

Fund of Funds: Funds that invest in other well-performing funds, expecting to mirror their performance, are called fund of funds. They pre-specify the mutual funds that they will buy or the kind of schemes they intend to invest. These are usually open-ended funds.

In a nutshell

Mutual funds, while subject to market risks are very good options when it comes to investing. You get to choose from an array of funds. They have the potential to generate great returns in the long-term.

Have Referral Code?