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.
What are the different types of mutual funds?
There are various types of mutual fund schemes to meet the different needs of different people. Largely there are three types of mutual funds.
Equity or growth funds
- These invest mainly in shares, i.e. shares in companies
- The main objective is the creation of wealth or capital appreciation.
- They have the potential to generate higher returns and are best for long-term investing.
- Examples would be
- Large Cap funds that invest primarily in companies that manage large established businesses
- “mid-cap funds” investing in medium-sized companies. funds investing in medium-sized companies.
- Small Cap funds investing in small businesses
- “Multi Cap” funds” that invest in a mix of large, medium and small companies.
- “Sector” funds that invest in companies linked to a type of activity. Ex. Technology funds that only invest in technology companies
- “Thematic” funds that invest in a common theme. Ex. Infrastructure funds that invest in companies that will benefit from growth in the infrastructure segment
- Tax savings funds
Income or bonds or fixed income funds
- These invest in fixed income securities, such as government securities or bonds, business documents and bonds, bank certificates of deposit and money market instruments such as treasury bills, commercial paper, etc.
- These are relatively safer investments and are suitable for income generation.
- Examples would be liquid funds, short-term, floating rate, corporate debt, dynamic bonds, gold funds, etc .
- They invest in both equities and fixed income, thus offering the best of both, both growth potential and income generation.
- Examples would be aggressive balanced funds, conservative balanced funds, retirement plans, child plans, and monthly income plans, etc.