A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Can I invest in multiple asset classes using a mutual fund scheme?
Mutual fund schemes that invest in a single asset category are like specialized players or beaters. While some other schemes, known as hybrid funds, invest in more than one asset class, for example some invest in both stocks and debt. Some may also invest in gold in addition to equity and debt.
In cricket, we see all-rounders batting as well as all-rounders bowling depending on the skill at which they are best. Similarly, there are mutual fund schemes that invest heavily in one asset class over another.
The oldest category, the break-even fund category, invests in stocks and debt. The allocation to capital is normally higher (over 65%) and the rest is indebted.
The other popular category known as MIP or monthly income plan strives to provide monthly (or regular) income to investors. However, there is no guarantee of regular income. These schemes invest predominantly in debt securities so that they can generate regular income. A small portion is invested in stocks to improve returns over the years.
Another variant of the hybrid scheme invests in stocks, debt and gold, to leverage three different asset classes in a single portfolio.
An investor has the option to buy different stock or debt schemes or gold funds to create a hybrid portfolio or alternatively buy a hybrid fund.
