Mutual Funds

Mutual Funds give investors an opportunity to invest in a professionally managed and diverse group of financial instruments at a reasonably low cost.

It is common knowledge that investing in Mutual Funds is a better way to put your money to work towards fulfilling your Financial Goals/ Life Goals, rather than simply letting your cash waste away in a savings account.

Types Of Mutual Funds

Money Market Funds: The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You will not get great returns, but you will not have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).

Bond/Income Funds: Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees.

Fixed Maturity Plans ( FMPs): are kind of debt fund where the investment portfolio is closely aligned to the maturity of the scheme. Due to taxation benefit FMPs deliver higher returns than FDs.

Hybrid Funds:

a) Monthly Income Plan : seeksto declare a dividend every month. It therefore invests largely in debt securities. However a small percentage is invested in Equity shares to improve the scheme yield.

b) Balanced Funds : The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 65-75% equity and 25-35% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.

c) Capital Protected Schemes : are closed ended schemes, which are structured to ensure that investors get their principal back, irrespective of what happens to market. This is ideally done by investing in Zero Coupon Government Securities whose maturity is aligned to the scheme’s maturity.

Gold funds: Allow investors to purchase and sell gold bullion without making physical transactions. Any amount purchase is possible through SIP and Gold Units can be redeemed on any business day.

Equity Funds: Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities.

Index Funds: The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index such as the BSEs Sensex or NSEs Nifty50.

Investment approach of Equity funds can be Growth based or Growth based or Value based or a blend of both.

Growth funds : Growth Funds invest in fast growing companies. Investor looks at the growth momentum.
Value funds: Value investing approach is based on premise that stock/ sector is current likely undervalued and the market will eventually will realize it’s true value. So, a value investor will buy such a stock/ sector today and wait for the price to move up. At this time, the value investor will exit and search for another undervalued opportunity.

Investment Options in Mutual Fund Schemes:

1. Growth Option :  This option is suitable for investors seeking growth in value of their investments.

2. Dividend Payout Option:  Unlike the growth option, investors opting for the dividend option will get a payout in the form of dividend. This option is ideal for short term investments, especially in debt. Debt mutual funds with dividend options are a good option for senior citizens or people who require a steady income flow and not only capital appreciation.

This option will give the investor the benefit of moderate capital appreciation along with dividend returns over the period of holding.

3. Dividend Reinvestment Option:  This option is suitable where investment horizon is less than the time for holding the units for benefits under Long Term Capital Gains Taxation.

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