What are Mutual Funds | Different types of Mutual Funds

Introduction

In this article, I will be discussing everything about Mutual funds. Is it good or bad? How do mutual funds work? And yes, after going through this, You will be able to answer questions like “What are Mutual funds” ?. 

I will also discuss in detail different types of Mutual Funds.

Where to do our investment

Every month as we get our salary. We try to save some money after incurring all expenses. This can be saved by putting money in banks. But trust me, putting money in banks is the worst idea as money losses value with time because of inflation.

Different Types of Investments

This is the reason people tend to save money in different places. These are as follows:

1. Savings Accounts

2. Fixed Deposit

3. Gold and jewelry

4. Real estates

5. Stock markets

6. Government-issued Bond 

7. Corporate Bond

8. Cryptocurrency and Bitcoin

9. And many, many more

What I understand from my one and a half-decade of investing that there are primarily three aspects in every investment:

• Return(%): Basic should be that return should always be more than inflation; there is no use in investing.
• Risk: This means how much the risk is, whether we will be able to mitigate the risk and get a better return, or is there a risk of losing our money.
• Time: How much time you need to be invested in getting the desired result.

The basic understanding is that the return will also be high if the risk and time are high. 

So now, let’s clarify your doubt about various investment and their risk profile:

Saving account :

1. It is the least risky investment option.
2. No time restriction. We can put and withdraw money any time 
3. We get around a 4% return on this account

Fixed Deposit:

1. Very less risk
2. Timebound: Generally six months to 5 years. In this tenure, we can only take our money back by breaking the FD.
3. We get 5% to 7% in this.

Gold and jewelry:

1. Moderate Risk: Prices keep on fluctuating.
2. You have to be invested for a very long time after 2012; gold has not given an excellent return compared to another investment plan. 

Real estate and Property 

1. Low, moderate risk
2. It requires very high capital to invest.
3. Before 2011 real estate was giving an average return of close to 25-30%. But in the last five years, it has provided only 5%.

Stocks:

1. High Risk
2. It all depends upon how knowledgeable you are in the stock market
3. tenure also depends upon your goal

Now and then, we have heard that investing in Stocks is not good, and that’s why people in India prefer to invest in Fixed deposits, Life insurance plans, and other government-related saving plans because it comes in some form of guaranty.

This guarantee creates a loss of return, which generally people understand when it is too late for them. 

I completely understand that everyday people who go for doing jobs incorporates have limited time to know how the stock market works, but to overcome that, we have Mutual funds, which in my view no one should ignore if they want to have a high corpus in 5-10 years.

The best advice that I can suggest to you would be never to put all your money into one type of investment. It is risky to invest in one place only.

If you have diversified your investment, there is very little chance that your overall investment will be at risk.

What are Mutual Funds:

It is a different type of investment where you can invest your money in different segments in one single account. 

In simple words, you can diversify your investment by investing in a single plan. 

Asset Management Companies are the companies that take care of any typical Mutual funds. We give money to them(AMC), and they take care of our portfolios. Aditya Birla, Reliance Tata, etc., are some examples of AMC. Icici has more than 1200 MF’s of different categories. 

As far as the returns are concerned, data show that historically MF’s have given as low as 4% and max 30% that means some Mf’s can be significantly less Risky, and some can be very high. It all depends upon Asset Management Companies where they are investing and what return they are getting.

For example, if they invest in stocks, it will be riskier hence higher return than investing in government bonds with low returns. 

Types Of Mutual Funds:

Now the question arises “what are the various types of mutual funds”? Well, the answer is simple there are different types of MF’s. They are as follows :

Equity Mutual Funds:

In this type of MF’s as the name suggest that AMC are investing in the equity market but here also they invest in 4 different ways, which are as follows:

• Large-cap Equity Fund: Money invested in large companies with an established business running for a long time with minimum risk. These are the minor risky fund, but returns are also not very high.
• Mid-cap Equity Fund: As the name suggests, these are invested in mid-sized companies. Growth opportunities are better than large ones with moderate risk.
• Small-Cap Equity fund: These are invested in small-size companies with high risk and high returns.
• Multi-Cap equity funds: These are balanced funds invested in large mid and small at the same time means in a portfolio of 15-16 companies. Money is diversified in all companies equally or in some proportions.
• ELSS, or equity-linked saving scheme, is a scheme in which we can invest and save income tax US 80C as our investment will be locked for a minimum of 3 years. 
• Sector Mutual fund: this focuses only on a particular sector such as agricultural fund, Power fund, etc. These are riskier than other equity funds as an investment is not diversified, and any problem in the sector will only create problems and losses for investors.
• Index Fund: These are passively managed funds as there is no fund manager, and their performance depends upon Nifty and Sensex. It moves according to the market that means if the Nifty is going up, then the Index fund will also up and vice versa.

Currently, there are multiple apps in the market with excellent features to make even a layman understand mutual funds. These apps have a different algorithm that helps us know how much particular MF’s have performed in history and the likelihood of future returns.

But I would like to remind you again that whatever these apps suggest is just expected returns, and there is no guarantee of such returns. That is the prime reason that in every MF’s Ad that “MF investments are subject to market risk; please read the offer documents carefully before investing.

And since these are equity mutual funds, risk will always be there because money is directly invested in the stock market. 

These apps do a comparative analysis of different MF to prove which MF is better than the other. This will help anyone to make a better decision while buying a particular MF.

One more critical point while buying any MF is to check its expense ratio. It should not be too much as these are commissions that all AMC takes to maintain our account. 

Do consider the benchmark return. As some MFs do well in the short term and some in a long time. 

Also, check the total AMC investment amount to date as if they have invested a significant amount, it will shrink as it will be challenging to get a better return in the large amount. In other words, the value of money is so much that getting a return on such large some becomes extremely difficult.

Debt Mutual Funds:

These are those MF where money is invested in debt instruments such as Bond Debentures certificate of deposits etc. These are the least risky, and hence returns are also on the lower sides. 

I will share all these terms in detail in some other article as if I start explaining each time; then this will become a very long article. 

Although I would love to explain to you about Government Bonds, whenever the government needs a loan from the public, they issued a Government bond at a specific rate and tenure.

Debt funds are also of many types; let me explain you one on one.

1. Liquid funds: As the name suggests, they are those types of funds that can be liquidated very easily, which can be converted into cash quickly. For example, an Asset liquid fund is one of the examples where we are getting a fixed return of 7% year on year. It’s a very low-risk fund with consistent returns throughout 
2. Gilt fund: these are those MF where companies invest in government-issued bonds. And since the government is borrowing money on this fund, technically, there is a zero risk. But there can be some minute changes in interest rates. 
3. Fixed maturity plan: These are alternatives to fixed deposits. These are also significantly less risky funds, but your money will be set for a definite period.

What are Hybrid Mutual funds:

As the name suggests, these are balanced funds where investments are made both on debt and equity funds as some people want a mix of both; for example, someone can opt for a mutual fund with 50% equity and 50% debt exposure. In this way, the money will get a balanced return. If more money is invested in debt than equity, it will be called a Balanced saving fund. To give some perspective, let’s assume if 70% of the money is invested in debt and 30% is invested in equity, then it will be called a balanced saving fund. In vice versa, it means 70% equity and 30% debt; then, such funds are called balanced advantage funds.

Rest I would suggest that this article has already given you detailed information about MF.

Conclusion :

In the end, I would like to tell you about the pros and cons of MF.

So as far as pros are concerned, MF’s are highly diversified, so as we know, diversification minimizes our risk to a great extent. In my opinion, it is less risky than Gold Stocks and real estate. But still, it all depends upon which MF you are going to buy. 

Also, it is Affordable. You can start your SIP as low as 500 per month, and also, highly-skilled, educated fund managers manage these, so again risk becomes obsolete. And yes, this can also be considered a con as we trust someone we don’t know. 

Thank you for reading this. I will be coming up with a new article very soon.