What is Mutual Fund | Explain Types of Mutual Fund

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Explain Types of Mutual Fund

Today investors have many ways to invest in the market. Mutual funds also give good

opportunities to investors to invest in the market. Investing in mutual funds for a short period of

time always carries the risk of loss of returns, especially when investing in equity-oriented funds,

except in balance and debt funds.

But the returns on long-term investments in the last few years cannot be ignored. Long term

investments in mutual funds are attracting a lot of investors. In this type of investment, the

money of the investors remains safe and secondly, it also gives them good returns.

India’s first mutual fund came in the form of Unit Trust of India in 1963. In the era of

liberalization, the government allowed public sector banks and institutions to bring mutual funds.

In 1992, SEBI passed a bill under which investors’ money should be protected in the market and

the security market should be controlled. As far as mutual funds are concerned, SEBI notified

regulations regarding mutual funds in 1993.

Since then, private sector companies have been allowed to enter mutual funds. SEBI makes rules

from time to time to protect the money of investors and issues various guidelines.

What is Mutual Fund – Meaning of Mutual Fund:-

Mutual Funds As the name suggests, the money of many people are invested in one fund. In

mutual funds money is collected from various investors and this money is invested in shares and

bond markets.

Units are allotted to the investor for his money. Now in proportion to these units, mutual fund

houses distribute the profits of buying and selling shares or bonds among the fund (unit) holders.

Mutual fund holders get this dividend or all expenses incurred on the dividend fund like AMC

(Asset Management Company) charges, admin expenses, agent’s commission etc.

Usually, mutual funds are launched in the market from time to time under a scheme. It is

necessary for any mutual fund to register its name with the Securities and Exchange Board of

India (SEBI).

You can invest in mutual funds on your own or take the help of a broker to invest. For this, you

need to open a bank Demat account.

It is better for investors to adopt a Systematic Investment Plan (SIP), in which complete planning

is done about the tenure and how much to invest.

Why do we Invest in Mutual Funds:-

Easy to Manage: You can buy and sell any number of mutual funds on any given day. Whereas

you cannot buy and sell this bank FD, PPF or insurance on a government holiday or Sunday.

Multiple Options: Mutual Funds allow you to take multiple stocks and bonds with low

investment. Money is not invested in any one of the mutual funds in which you invest. Rather,

investments are made at different places so that even if there is a recession in one sector, less

profit is taken from the other sector.

Low Fees: Mutual fund expense ratio usually ranges from 1.5-2.5% of your investment. The

expense ratio is the fee that you pay to AMC for managing your fund (investment). This is less

because many people invest in a mutual fund and this fee is talked about among all.

Transparency: Mutual funds are regulated by the Securities Exchange Board of India (SEBI)

and their NAV (Net Asset Value) or price is announced on a daily basis.

Explain Types of Mutual Fund – Important Types of Mutual

Funds:-

We can mainly divide Mutual Funds into two parts. These are the following-

1. Mutual Funds Based on Asset Class

2. Equity Funds

Now, We will go into the depth of these 2 parts.

Mutual Funds Based on Asset Class:-

In this type of mutual fund, investments are made in one or more than one type of asset. On the

basis of asset class, we can divide mutual funds into the following parts.

1. Debt Funds-

Debts funds are mutual funds that provide a fixed income return. Debts funds invest in

commercial paper, Treasury bills, corporate bonds and many other money market instruments.

All these securities carry a fixed rate of interest.

Their maturity date is also fixed. Debt funds are also called fixed income securities because of

their assured returns. Debt funds work on the concept of low-risk low return.

2. Liquid Funds-

As the name suggests, Liquid Funds can be redeemed at any time. The money is credited to your

bank account within 24 hours of applying.

Liquid Funds are a type of debt fund. You can also invest in liquid funds for a minimum period

of 3 days. The securities in which liquid funds invest have a maturity of up to 91 days.

Liquid funds offer the lowest returns in the debt fund category but are also safe. Liquid funds are

the best alternative to savings accounts and bank FDs.

Equity Funds:-

This is the most popular fund among mutual funds. People invest in equity funds with the

expectation of higher returns by taking more risk. Inequity mutual funds almost the entire

investment is done by the fund manager in the stock market. Equity mutual funds can also be

further divided into different schemes which are as follows –

1. Large Cap/Bluechip Fund-

Friends, here capital means, the market capitalization of a company i.e. size/value of that

company. Large Cap company’s main features. Like trusted, reputed and leading company in that sector

Large Cap Fund / Blue Chip Fund are those mutual funds that invest their money in a company

with a large market capitalization. The large-cap company has already achieved its growth so

here returns are less than other funds but consistency in returns is high. Large-cap funds are less

risky than small and mid-cap funds. This scheme is best for people who have to invest at low

risk.

Large-cap companies are better established than before. Examples of some large-cap companies

in India are Reliance, Britannia, ITC, HUL.

2. Mid-Cap Funds-

The mutual fund schemes which invest in mid-cap companies are called mid-cap mutual funds.

A mid-cap company is a listed company in the mid-range market. These are the companies that

have established their business and are striving for further growth.

Thus mid-cap funds have the potential to deliver higher returns than large-cap funds. They give

fewer returns than small-cap funds with slightly less risk.

An investor who wants good returns with moderate risk can choose mid-cap mutual funds.

3. Small-Cap Funds-

Mutual funds that invest in small-cap companies are called small-cap funds. Companies with

small-cap funds try to achieve stability with new businesses in the market.

They have a high potential to give returns but also come with a lot of risks. Also, the risk factor

in Small Cap Funds is highest as compared to other schemes. These mutual fund schemes are

considered to be the most volatile

4. Multi-Cap Funds-

As the name of this mutual fund suggests, this mutual fund invests in more than one type of

stock. Under a multi-cap fund scheme, a fixed ratio is invested in large-cap, mid-cap and small-cap companies.

Due to this feature, multi-cap funds are very popular among mutual fund investors. It is based on

moderate risk and returns.

5. Flexi Cap Funds-

This new category of mutual fund has been taken out on the lines of Flexi Cap Fund Multicap

Scheme. Flexi Cap Fund As the name suggests, these categories are free or flexible to choose

their funds.

In the Flexi Cap Fund category, 65% of the allocation will be in Equity and Equity Oriented

Funds. This 65% can be invested in large cap, mid cap or small cap as per the choice of the fund

manager without any pre-determined limit. Flexi Cap Fund does not have fixed allocation rules

like multi-cap funds.

6. ELSS Mutual Funds-

ELSS stands for Equity Linked Savings Scheme. ELSS is a scheme that invests in equity. This

scheme is equity-oriented. In the recent past, the practice of ELSS scheme for tax saving has

increased among the people.

The money invested in ELSS has a lock-in of 3 years. On investment made in ELSS, we get

exemption of up to 1.5 lakh rupees under section 80C of Income Tax.

Conclusion

Friends, today you must have understood that how many types of mutual funds are there and

what is the specialty of which mutual fund in “What is Mutual Fund | Explain Types of

Mutual Fund” this blog article. You can also choose the best mutual fund for yourself keeping

these things in mind according to your need and risk.

If you have any question regarding Types of Mutual Funds then you can ask us through below

comment box.

 

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