Introduction:-
A mutual fund serves as a collective investment platform, gathering funds from multiple investors to be pooled and then invested across various financial instruments such as equities, bonds, government securities, and money market instruments. Skilled fund managers oversee the investment process according to the scheme’s defined objectives. The returns generated from these investments, net of expenses and fees, are distributed among investors based on their proportional contributions, calculated through the scheme’s Net Asset Value (NAV). In exchange for its services, the mutual fund charges a nominal fee. Essentially, a mutual fund represents a collaborative investment effort managed by professionals, typically structured as a trust under the Indian Trust Act, 1882, and regulated by SEBI. This overview offers insights into the functioning and various types of mutual funds.
How Mutual Fund Works?
Types of Mutual Fund:-
1. Equity Funds:-
Equity fund is a mutual fund scheme that invests predominantly in equity stocks. These funds aim to provide capital appreciation over the long term by investing in a diversified portfolio of company shares. It can further categorize based on such factors. Equity funds can be further categorized based on factors such as market capitalization (large-cap, mid-cap, small-cap), investment style (growth, value) and sector (technology, healthcare, financials).
2. Bond Funds:-
Bond funds invest in a variety of fixed income securities, including government bond, corporate bonds and municipal bonds. This fund is suitable for investors seeking regular income and lower volatility compared to equity funds.
3. Balanced Funds:-
Balanced funds also known as hybrid funds, this fund contains both the characteristics of equity funds and bond funds. This fund invests in both bond and equity funds to provide both capital appreciation and income. These funds offer diversification across asset classes and are suitable for investors looking for a balanced approach to risk and return.
4. Money Market Funds:-
A money market fund is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a highly stable asset value through liquid investments, while paying income to investors in the form of dividends.
5. Sector Fund:-
Sector funds focus on specific sectors of the economy, such as technology, health care, energy, or consumer goods. These funds provide targeted exposure to industries that investors believe will outperform in market. It is Managed by experts with deep knowledge of the chosen sector, these funds offer the potential for higher returns during periods of sector outperformance but come with increased risk due to their concentrated exposure. Sector funds are suited for investors seeking targeted exposure to specific industries or looking to capitalize on sector trends.
Conclusion:-
Choosing the right type of mutual fund depends on various factors, including investment objectives, time horizon, risk tolerance, and market outlook. By understanding the different types of mutual funds available, investors can build a well-diversified portfolio tailored to their individual needs and preferences. It’s essential to conduct thorough research, assess fees and expenses, and consult with a financial advisor if needed before making investment decision.
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Authors: Dhruv Dangodra | Associate Consultant | blogs@bilimoriamehta.com | +91 98709 25375
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