What are Mutual Funds & Types of Mutual Funds
Mutual Fund is an investment opportunity where Asset Management Companies (AMC) raise fund from the public and the amount raised is invested across asset classes in accordance with stated objectives in offer documents.
Benefits include professional management, diversification and enabling buying of high value share and bonds with small investments.
Mutual fund units are issued and redeemed by the AMC based on the fund's Net Asset Value which is determined at the end of each trading session.
NAV is calculated as the value of all the assets held by the fund minus expenses divided by the number of units issued.
Types of Mutual Funds:
On the basis of objectives
Growth/Equity Funds: Funds that invest in equity are called Growth/equity funds. These funds are suited for investors with high risk appetite seeking capital appreciation over medium to long term period.
Diversified Funds: As the name suggests, these are funds which are invested across sectors thereby diversifying risk. They are best suitable for risk adverse investors.
Sector Funds: A fund that invests totally in businesses that operates in a specific sector of the economy.
Index Funds: Funds are invested in the same pattern as market indices.
Tax saving Funds:Funds offering tax benefits under the Income Tax Act.
Debt/Income Funds: A fund where investment is predominantly done in fixed income bearing instruments such as bonds, debentures, government securities etc.
Liquid Funds:Funds are invested in highly liquid money market instruments.
Gilt Funds:Funds are invested in Central and State government securities.
Balanced Funds: They are funds which strike a balance between equity and debt instruments based on the investors risk appetite. The ratio can be 80:20, 60:40 and so on.
On the basis of Flexibility
Open-ended fund:The funds do not have fixed date of subscription and redemption.
Closed-ended funds: The funds have a fixed date of subscription and redemption.
Exchange Traded Funds
An exchange traded fund is similar to index fund as like index fund, ETF represents to a baskets of stocks that reflect an index such as Nifty.
An ETF however, is different from mutual fund and it trades like any other stock at stock exchange. Unlike mutual funds that have NAV calculated at the end of each trading day, an ETF's price changes throughout the day.
By owning ETF one gets the diversification of index funds plus flexibilities of a stock.
Gold ETF:Gold ETF (which is also known as Paper Gold) invest fund in Standard Gold of 99% purity and enables a buyer to buy units of Gold ETFs. The units one buys are stored in one's demat account. Units of Gold ETFs are listed on the stock exchange and they rise and fall as per the trends in the spot market for physical gold.