The Mutual Funds Bouquet

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Although Mutual Funds is a single investment vehicle, it encompasses a wide variety of funds. It is often confusing for a new comer to comprehend the 1000+ mutual fund schemes offered by 30+ fund houses (aka Asset Management Companies). In this blog, let us look at the broad classification of these funds.
  • Equity & Equity-oriented Funds - these funds invest 65-90% of their assets (money collected from investors) in equities - i.e stocks of companies listed in the stock exchanges BSE & NSE. Again there could be thematic funds depending on whether they invest in large-cap, mid-cap, small-cap or micro-cap stocks or across sectors such as banking, infrastructure etc.
  • Debt Funds - these funds invest 75-90% of their assets in debt securities. They would choose to invest in a combination of government and corporate bonds, the details of whose allocation is specified in the scheme's SID (Scheme Information Document).
  • Hybrid Funds - these are balanced funds with a 40:60 allocation towards stocks and bonds to offer hybrid return to investors.
  • Money-Market Mutual Funds - these funds invest in relatively short term maturing money market instruments such as government bills (90days) or certificate of deposits (15+ days). They offer returns at par with money market instruments and are good short term parking slots.
  • ELSS (Equity Linked Saving Scheme) - These funds invest in equity or equity-oriented Mutual funds but comes with a lock-in period of 3 years. All investments are eligible for 80c tax deduction. New investors may start out with ELSS since it offers them an opportunity to watch the fund perform in up and down market trends without having the option to pull out funds (especially in case of declining markets).
Open-ended or Closed-ended Funds?
Mutual funds could be tagged as open ended or closed ended by fund manager at the time of their first time offering. Open ended funds are available at any time for investors to join or exit. Closed ended funds are available for investing only during the window opened by the fund manager and exits are permissible only at pre-specified windows. In some cases exits are allowed with penalties called "exit loads" as well. The reason is these funds invest in securities with fixed maturities and hence withdrawal in the interim would greatly disrupt returns.

Regular or Direct Plans
Regular plans are those schemes sold by a Mutual fund distributor such as your bank or an online portal that offers all funds under one umbrella (eg.FundsIndia). Direct plans on the other hand are plans directly offered by the fund house to investors. The key difference lies in the lower expense ratio charged to direct plans resulting from savings in distributor fees.

Making a choice..
While selecting a mutual fund, it is important for the investor to understand under which category your choice of fund falls and its performance relative to its peers and that of the benchmark. Your financial planner could also help evaluate the funds' performance against key performance metrics and recommend if a particular scheme is aligned to your personal financial goals.

Comments

  1. Unknown1 October 2014 at 03:39

    LJ, why reinvent the wheel? Am sure you can do better than 101.

    ReplyDelete
  2. earnest Q28 June 2019 at 06:34

    Mutual fund has many advantages which can leads you to invest your money without any restrictions and make a money with good returns.
    Best financial advisors in Chennai
    Financial planners in Chennai
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    ReplyDelete

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