Type of Mutual Funds
A mutual fund is a form of investment operated by professionals or investment companies. The sole purpose of these companies is to raise the money from market via investors and further invest them in group of companies or securities with similar or diversified portfolios. These investment companies work a set of objectives. Mutual fund is meant for those people who are scared of investing in shares but still want to take benefit of share market. Mutual fund companies work very much like other companies. They raise money by selling shares of there funds in public.
They collect the money from market and use it for the purchase of investment vehicles like securities, bonds and shares. In return investor gets holding in these funds according to there investment. In most cases investors are free to sell there shares at any point of time. These mutual fund companies charge minimal fees called as entry load (charged at time of purchase of mutual fund) and exit load (charged at time of selling of mutual fund). The value of mutual fund fluctuates daily on basis of share market. The value of per unit of mutual fund is calculated in form of NAV (net asset value).
Mutual fund industry was born in 1924 when 3 Boston securities executives pooled and invested there money together. This idea of pooling and investing together came from Europe. On March 21st, 1924 the first official mutual fund named as Massachusetts Investors Trust was born. Important point to remember before investing in mutual funds: Always read the prospective carefully before investing. Read the annual report carefully. Get information about company?s investment objective, strategy, entry and exit load, past performance and the track record of fund manager. Always remember that mutual fund is subject to market risks.
Types of fund:
Broadly all funds can be classified as open ended or close ended or interval fund.
Open ended fund: Investor can invest and exit from fund at any time. There is no locking period.
Close ended fund: This type of fund allows entry and exit at specific time. These funds have fixed maturity value. Investors can invest in these funds only when the funds are open at the time of initial issue. Once the issue closes fund can neither be purchased nor be sold.
Interval funds: These funds combine the benefits of both open ended and close ended funds. They allow fresh investment and redemption on regular basis.
The different types of funds available in market are:
Equity or Growth fund: The funds which invest in equity shares are known as equity fund. These funds are very risky and highly volatile. They are best for those investors who are looking for capital appreciation and have the capacity to take risks. These funds are directly linked to stock market.
Index funds: These funds invest on the basis of market indices. These funds depend on market indices.
Diversified funds: These funds invest in various places and securities. These funds are meant for the people who are not very fussy about investing at one place or sector.
Hedge fund: These are very risky funds as these funds hedge risks to increase the portfolio value.
Balanced fund: These funds are meant for the investors who are ready to take moderate risks and expect regular and steady returns. These funds are ideal for long and medium term investors. These funds invest both in fixed income securities and equity shares. ?
Gilt fund: These funds are best for the investors who want to invest in state and central securities. These funds are backed by government and usually give fixed and secured returns. These funds are best for medium to long term investors.
Liquid or money market fund: These funds are best suited for short term investors. Investor can invest for as short as one day. These funds act as an alternate to fixed deposits and saving accounts. These funds invest in highly liquid instruments. These funds are best suited for business houses.
Debt or income funds: These funds are best suited for long term investments. These funds major invest in bonds, debentures and government securities.
Tax saving funds: These funds offer tax benefits and tax rebates.
Domestic funds: These funds invest in the securities within the boundaries of country.
Offshore or international funds: They invest in the securities out of country. They invest in foreign companies and securities.
Small cap stock funds: These funds invest mostly in small and new companies and IPO?s.
Mid cap stock funds: These funds invest in medium sized companies. The funds are less volatile than small cap companies.
Large cap stock funds: These funds invest in shares of big. These funds are least volatile as compared to small and mid cap funds.
Aggressive growth fund: This fund is a highly risk oriented fund and aims for high returns. This fund invests in stocks and derivatives.
Asset allocation fund: A fund which keeps the objective of asset allocation in mind. This fund invests in different assets and variety for securities with the main aim of consistent returns.
Cross over fund: This fund invest in both public and private equity.
Bond
mutual fund: There are three types on bond funds the municipal bond fund,
corporate bond fund and
Fund of funds: This mutual fund invests in other mutual funds.
Clone fund: A fund which tries to copy the performance of any fund by applying same strategies.
Sector fund: A fund which invests entirely in one sector. These are less diversified funds and risks depend on the sector chosen to invest.
Tracking Fund Performance:
After understanding different types of funds it is most important to understand how to track the fund. A mutual fund's performance is measured in form of its profitability by calculating total return, yield per unit or change in its NAV.
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