Mutual Fund is for everyone
The great investor Warren Buffet has said “You don’t have to be a genius to invest well but, master the basics.” For many people hectic working schedule and increasingly busy lifestyles leave little opportunity for learning the basics of investing. Nevertheless, saving and investing for future’s financial goals has to be considered one of life’s priorities. Millions of investors in India and abroad are now using mutual funds as their investment vehicle of choice to save and accumulate wealth for their future financial goals like children education, wedding, buying a house and for building a retirement nest egg. Whatever the financial goal, mutual fund is an excellent medium to accumulate wealth over a period of time to achieve that. Though mutual fund is not new in India yet investment in mutual fund is still a puzzle for most of Indians. Investment process is no more difficult and there are various online and offline channels through which mutual fund units can be purchased. Only dilemma is about selecting a right mutual fund. There are too many choices available and selecting the right mutual fund scheme is really a difficult task for a common investor. It’s important to understand that each mutual fund has different risks and rewards. Investment in mutual fund is subject to market risk but all funds do not have same level of risk. In general, the higher the risk, the higher the potential returns.
What is Mutual Fund
Mutual Fund is a pool of funds collected from many investors and invested in various securities like equity shares, bonds, debentures, government securities or certificates of deposits etc. typically known as underlying asset. Mutual funds are managed by professional fund managers who attempt to maximize returns through their stock picking skills and minimize the portfolio risk through diversification.
At the fundamental level, there are three varieties of mutual funds.
1) Equity funds
2) Debt Fund
3) Gold Fund
Equity Funds
Funds that invest in equity shares are called equity fund. The investment objective of equity fund is to provide potential for high growth and returns with a moderate to high risk. Such schemes are best suited for investors with a long term investment horizon. These schemes are either actively managed or passively managed. Passively managed scheme is the one that replicates the index. Equity Funds are further categorized as large cap, mid cap or small cap fund based on market capitalization of the shares in which these funds invest.
Debt Fund
Objective of debt fund is to provide steady income through investment in debt securities. Based on the debt security in which the fund invests it can be further classified as income fund, bond fund or gilt fund. A gilt fund predominantly invests in government securities where as an income fund invests in bonds, debentures, Certificate of Deposits (CDs), commercial papers (CPs) etc. A bond fund predominantly invests in bonds and debentures. Funds are suitable for investors who are ready to take little extra risk but looking for higher post tax yield compared to their bank fixed deposits. Bond funds have potential to yield higher returns than the fund which purely invests in CPs and CDs but with little extra risk. Debt funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.
Gold Fund
Gold fund scheme of mutual fund is the one that invests in Gold Exchange Traded Fund (ETF). Gold ETF further invests in physical gold. Gold provides perfect hedge against inflation hence it provides stability to the portfolio. Gold fund is Ideal for Investors looking for further diversification of their portfolio.
Hybrid Funds
Hybrid fund invests in more than one asset class. The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. On the basis of underlying assets in these funds they can be further classified as balanced fund, Monthly Income Plan or Multi Asset Fund. The strategy of balanced funds is to invest in a combination of debt securities and equities. A typical balanced fund may have minimum 65% allocation in equity and 35% in debt. A monthly income plan usually has 5% to 25% allocation in equity and balance in debt securities. The Multi Asset Fund or an asset allocation fund has exposure in equity, debt and gold but these kinds of funds typically do not have to hold a specified percentage of any asset class. The fund manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. Some fund may restrict the allocation of a particular asset classes beyond a certain levels to ensure that there is allocation in each asset class all the time.
Risk appetite if each investor may vary but there are mutual fund schemes to help investors to achieve their financial goals.
