New to Mutual Funds - Things you must know

Mutual Funds have come a long way in gaining popularity as an investment avenue. However, there are still who are unable to demystify this phenomenon. We start this series off by looking at the basic setup of Mutual Funds and the various types of funds which in turn should lead us towards understanding the depth of mutual funds as an investment vehicle.

The Mutual Fund setup -

Based on Structure

Open Ended Funds – These funds come without any pre-determined lock in period; they are available for subscription / redemption through the year without any restriction. Typically, one would see the fund launch NFO (new fund offer and then the fund will re-open after the initial subscription and will be traded through the year without any restrictions.

Close Ended Funds – These funds are open for subscriptions for a pre-determined period during the NFO and they come with a typical lock-in period. Some funds will provide the option of redeeming prior to the lock-in at an exit load, post the lock-in, the fund will either be converted to an open-ended fund or will undergo an auto-redemption and the fund value will be paid out.
Based on Objective & underlying assets –
Equity Mutual Funds – Within the gamut of Mutual funds, equity mutual funds are perceived to be high-risk. They invest 80%-100% of funds available into equity markets. Here again, there are a host of options available from which an investor can choose -

Market Capitalization
o Largecap Funds

o Midcap Funds

o Small / Micro cap funds

Style of Investments
o Growth Funds

o Value Funds

Theme Funds
o Sector specific funds

o Index funds

o International funds

o Others – special situations, P/E fund of funds (fund allocation based on market P/E) etc.,

Hybrid Mutual Funds – As the name suggests, they are a heady combination of debt – equity. If a fund has over 65% investment in equity, it is Hybrid – equity fund, else it is categorized as a Hybrid – debt fund. These are slightly conservative funds and hence suitable for planning for medium-long term financial goals such as Children Education, Retirement etc.,

Debt Mutual Funds – The underlying investments in this case would vary from call money, corporate deposits, bank deposits, T-bills, floating rate / fixed rate bonds, Gilt bonds – depending on the tenure of the investment. Within the debt funds some of the options available are –

• Liquid / Liquid plus funds

• Floating Rate Funds

• Income Funds

• Monthly Income Plans

• Gilt Funds

• Short / Long Term Bond funds

The choice would vary based on the trend of interest rates, cost /taxability and most importantly the tenure of the investment.

Hope this bit helps you take baby steps into the world of mutual fund investments.

Source: www.moneycontrol.com

Thanks,

Gaurav Agarwal

Head Dealer

DENIP Consultants Pvt Ltd