Mutual funds - Types of Mutual Funds

MUTUAL FUNDS, TYPES OF MUTUAL FUNDS

What is the different between mutual funds and shares?

In case of shares investor takes all the decision on their own, like where to invest, for how long to invest, when to buy shares, when to sell shares etc. Whereas in case of mutual funds an investor invests his money in a mutual fund company like ICICI Prudential, HDFC mutual funds, Birla Sun Rise mutual funds. These companies have a mutual fund manager or mutual fund managers who then take decision where to invest the money of the investors, whether in Equity in any other company or in debt etc.

What is Mutual Fund?

Mutual Fund is an organisation that take money from different investors and then invest that money in different avenues like equity, debt of any other company to make profit out of it. The profits earned by the mutual funds company may be in the form of dividend, interests or gain i.e. the difference between the cost price and selling price. This profit earned by the mutual fund company is then distributed among the investors. These companies usually keep 1%-3% of the total investment as expense ratio also known as Management Expenses to keep the company running.

1. Equity Mutual Funds; In such kinds of Mutual Funds the money collected from the people by the mutual funds companies is invested in Stock Market or Equity of another companies. However, in such types of Mutual Funds the risk involved is high since they are subject to stock market fluctuation.

2. Debt Mutual Funds; In this case the money collected from people is invested in debt. In this case the risk involved is relatively lower as there is no stock market fluctuation involved.

3. Hybrid Mutual Funds; As the name suggests in this case of Mutual fund the money of the people is invested in both equity and debt.

4. Solution Oriented Mutual Funds; As the name suggest the aim of these funds is to provide solution to a specific purpose of an investor be it the child marriage, higher education of the child etc. People invest money in mutual funds and can withdraw at the time of need due to child marriage, higher education etc.

5. Other Mutual funds; The example of this type of mutual fund is Index Fund. In this the money collected from people is invested in indexes like Nifty and Sensex.

Another type of Mutual Fund is the Liquid Mutual Fund. Liquid Mutual Fund is a sub category of Debt Mutual Fund.

Liquid Mutual is a type of Mutual Fund that invest in securities with a residual maturity of up to 91 days. Assets invested in this are not tied up for a long time as liquid funds. Moreover, it usually does not have a lock in period.

Now the question arises who can use Liquid Mutual Funds?

Liquid Mutual Funds are suitable for people who have investable surplus and wish to park their funds for a shorter period of time. In case an investor is not sure where to invest his surplus funds, he/she can invest in Liquid funds and can withdraw whenever required. Talking about the returns on such funds, there is a return of around 7% as compared to just 4% on savings account.

However, along with the reward comes the risk. It is the basic rule of finance that more the reward more is the risk involved. The main risk involved in such kind Mutual funds is that if the mutual fund company invest funds in instruments such as Certificate of deposits or Treasury bills or Commercial papers of a company which goes bankrupt then, in that case one can lose money. Real example of this, is the Liquid Mutual Funds invested in ILFS which went into losses also resulting in a loss for Liquid Mutual Fund holders. Thus, it is advisable to invest in a company having a diverse portfolio stating investments in a variety of instruments of different companies. This will help to reduce risk.