Basics of Mutual Funds
/2015-08-11 09:22:12
Shweta Jain

You receive your pay-check and you have the usual expenditure – rent, utilities and household expenses and that little discretionary spending as a reward for all the hard work you put in. But what happens to the portion you save? With the array of investment options out there, people often stick to the most easily available option like FDs. Now, let’s break down another simple tool for investing – mutual funds.

What are Mutual Funds?

Mutual funds are pooled investments of a large number of individuals or institutions. These funds are managed by asset management companies (AMC) who appoint qualified professionals to run different schemes and strategies. Depending on a fund’s predetermined strategy, a mutual fund invests the pooled money into various stocks and bonds available in the market.

Types of Mutual Fund

Mutual funds can be broadly categorised as equity funds, debt funds, hybrid funds and overseas funds. A few classifications of equity funds can be large cap funds – those that invest in large company stocks, mid and small cap funds – which invests in medium sized company stocks and small sized company stocks, multi cap funds – which invests in a combination of all three types of companies. There are also schemes that focus on investing only in the companies of a specific sector such as technology or infrastructure or pharmaceuticals. These funds are typically riskier than schemes which invest across all sectors. Debt funds can be classified as accrual funds – which invest in the various maturities of debt issued by companies; gilt funds – which invest in debt of various maturities issued by the government; short term funds – which invest in debt issued by companies with a 1-3 year period; and ultra short and liquid funds which invest in debt with a maturity of less than a year. Hybrid funds are those funds which invest in a mix of equity market securities as well as debt market bonds usually depending on various market conditions. Overseas funds are typically fund of funds – which means that they invest your money into a regulated fund domiciled outside of India and which then invests into securities of various countries and regions like the US, Europe, China, Latin America and so on. Mutual funds is a expansive topic and we’re going to break it down into segments so its easier to understand. Stay tuned for the next segment.