MUTUAL FUND

OVERVIEW

Mutual funds are investment companies whose job is to handle their investors’ money by reinvesting it into stocks, bonds, money market instruments or a combination of the three. Much like stocks, most of these funds can be purchased and redeemed anytime allowing them to have a high liquidity situation all times. They are suitable for all class of investors, be it an individual, corporates, trusts, societies, AOP or an NRI. Diversification, Professional Management, Convenient Administration, Liquidity, Low Cost and Transparency are some of the advantages which they provide.

Types of Mutual Funds Scheme in India

Mutual Funds are broadly classified into three categories viz. Equity Funds, Debt Funds and Balanced Funds.

EQUITY FUNDS

These funds invest a major part of their corpus in equities. The composition of the fund may vary from scheme to scheme and the fund manager’s outlook on various stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

· Diversified Equity Funds
· Mid-Cap Funds
· Sector Specific Funds
· Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon and rank high on the risk-return matrix.

DEBT FUNDS

These Funds invest a major portion of their corpus in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

• Gilt Funds: Invest their corpus in securities issued by Government, popularly known as GoI debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

• Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.

• MIPs: Invests around 80% of their total corpus in debt instruments while the rest of the portion is invested in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

• Short Term Plans (STPs): Meant for investors with an investment horizon of 3-6 months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

• Liquid Funds: Also known as Money Market Schemes, These funds are meant to provide easy liquidity and preservation of capital. They invest in short-term instruments like Treasury Bills, Inter-Bank Call Money Market, CPs and CDs. These funds are meant for short-term cash management of corporate houses with an investment horizon of 1 day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

BALANCED FUNDS

These funds, as the name suggests, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.