What is a 'Mutual Fund'?
Mutual fund means a professionally-managed investment scheme which is usually run by asset management company which brings together a group of people and invests money in stocks, bonds and some other financial securities. To be precise, a mutual fund company helps in pooling money from a range of investors and then invest the amount in different asset classes.
Different types of mutual fund schemes:
- Open-ended scheme means a scheme which is available for subscription and for repurchase on continuous basis. As the term open-ended depicts, these schemes do not have a fixed maturity period.
- Close-ended fund or scheme means a scheme having fixed maturity period, say 7-10 years. These schemes are open for subscription only during a specified time period at the time of their launch.
- Equity-oriented schemes work for a particular aim of providing capital appreciation over medium to long- term. These schemes primarily invest a major part of their corpus in equities. These funds are for the investors having higher risk appetite. Schemes offer different options to the investors such as dividend option, capital appreciation, etc. Therefore, investors can choose any option according to their preferences.
- Debt-oriented schemes focus on providing regular and steady income to investors. These schemes invest in fixed income securities including bonds, corporate debentures, government securities and in money market instruments. These schemes carry lesser amount of risk in comparison to equity-oriented schemes. These schemes are not affected due to the fluctuations in the equity markets. Since these schemes come with lower risk, opportunities of capital appreciation are limited.
- Balanced funds focus on providing both growth and regular income. These schemes invest in both equities and fixed income securities. Amount of investment depends upon the proportion which is indicated in offer documents. These schemes are appropriate for those investors who look for moderate growth. Since some corpus is invested in equities too, these schemes are affected due to the fluctuations in equity market. However, NAVs of these funds are less volatile in comparison to pure equity funds.
- Money market fund also known as income fund, mainly focuses on providing easy liquidity, preserving capital and providing moderate income. The returns on these schemes do not fluctuate as much as other schemes.
- Gilt funds make investment exclusively in the government securities. These government securities have zero default risk. The NAVs of these schemes fluctuate because of changes in interest rates and several other global factors.
- Index Funds are mainly for the risk-averse investors. These schemes replicate the portfolio of particular index. Simply put, these schemes invest in the securities in the similar weightage as is comprised in an index. The NAVs of these schemes fluctuate in tandem with the rise or fall in the index. However, the fluctuation cannot happen exactly by the same percentage because of some factors like "tracking error".
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