What are Mutual Funds?Mutual funds are a type of investment that takes money from many investors and uses it to make investments based on a stated investment objective.Each shareholder in the mutual fund participates proportionally (based upon the number of shares owned) in the gain or loss of the fund.
Why do People Invest in MutualFunds?Mutual funds offer investors an affordable way to diversify their investment portfolios.Mutual funds allow investors the opportunity to have a financial stake in many different types of investments.These investments include: stocks, bonds, money markets, real estate, commodities, etc…Individually, an investor may be able to own stock in a few companies, a few bonds, and have money in a money market account. Participation in a mutual fund, however, allows the investor to have much greater exposure to each of these asset classes.
Continued….Most mutual funds are professionally managed by an investment expert known as a portfolio manager.This individual makes all of the buying and selling decisions for the fund.There are thousands of different mutual funds.This provides investors with many options to help them achieve their investment objectives.
Types of Mutual Fund SchemesBy Structure Open-Ended – anytime enter/exit Close-Ended Schemes – listed on exchange, redemption after period of scheme is over.By Investment Objective Equity (Growth) – only in Stocks – Long Term (3 years or more) Debt (Income) – only in Fixed Income Securities (3-10 months) Liquid/Money Market (including gilt) – Short-term Money Market (Govt.)Other Schemes Tax Saving Schemes Special Schemes
Basic Mutual Fund Categories Mutual Funds can be divided into four basic categories based upon the funds investment objective. These categories are:1. Money Market Mutual Funds2. Stock Mutual Funds3. Index Funds4. Bond Mutual Funds5. Balanced Mutual Funds
Money Market Mutual FundsThis is the most conservative type of mutual fund.The goal is to maintain the $1 value of its shares while providing income.Invests in high-quality, short-term securities such as certificates of deposit, U.S. Treasury Bills, and U.S. Treasury Notes.MMMF’s are an appropriate place for savings.These funds have typically offered higher interest rates than bank savings accounts.Money market mutual funds are not insured by the FDIC.
Stock Mutual FundsType of fund that invests in stocks.These funds are also known as equity funds.There are many different types of stock mutual funds.Some of the most common include:Large-cap funds, mid-cap funds, small-cap funds, income funds, growth funds, value funds, blend funds, international funds, and sector funds.
Index FundsThese are mutual funds whose holdings aim to track the performance of a specific stock market index.The most common index fund tracks the S&P 500. These index funds invest in the exact stocks (and in the same percentages) as those found in the S&P 500.Index funds also track bonds, real estate, and other types of assets.These funds are lower cost than other types of funds.
Bond Mutual FundsType of mutual fund that invests in bonds.There are different types of bond mutual funds.Typically, bond mutual funds have the objective of Typically providing stable income with minimal risk.
Balanced Mutual FundsThese are also known as hybrid funds.These mutual funds invest in stocks, bonds, and money markets.These are very diversified mutual funds. The stock portion of the fund provides the potential for capital appreciation, while the bond and money market portion provide income.
Load v. No Load Mutual FundsA mutual fund that charges a commission to cover its administrative costs is called a load fund.A front-end load charges the load when the shares are purchased, while a back-end load charges the load when the shares are sold.A no-load mutual fund doesn’t charge a purchase or sales commission.
Top 10 Mutual Funds in IndiaICICI Prudential Discovery InstIDFC Premier EquityHDFC EquityING Dividend YieldQuantum Long Term EquityTata Dividend YieldICICI Prudential Focused BluechipHDFC PrudenceCanara Robeco Equity DiversifiedICICI Prudential Focused Bluechip Equity Retail