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Mutual Funds

Mutual Funds Investments

Mutual fund is referred to a mechanism focusing on pooling money through issuance of units to investors, and investing funds in securities according to objectives disclosed in offer document. Investments made in securities are spread across a wide spectrum of industries. Therefore, risk gets diversified since movement of stocks cannot be in same direction at similar proportion at same time. Mutual fund companies allot units to its investors according to proportion of money invested by them. These investors in MFs are called as unitholders.

Profits or losses get distributed by investors proportionately according to the investments made. MF companies tend to come out with several schemes that are launched from time to time having diverse investment objectives. MFs should be registered with Securities and Exchange Board of India (SEBI) before collecting funds from public.

Mutual fund schemes are managed by professional portfolio managers. Their main job is to invest funds and then manage it carefully. Focus is on creating wealth for fund’s investors in such a way that investment objectives get satisfied. SEBI is the regulatory body of MF market in India, and it ensures ethical and transparent management of investors’ wealth.

Price of MF is called as net asset value (NAV) per share. This exhibits investments in several different securities rather than just one holding. NAV can be calculated by dividing total value of securities in a particular portfolio by total MF units outstanding.

Schemes As Per Investment Objectives

A particular scheme of mutual fund is classified as growth, income or a balanced scheme on the basis of its investment objective. These schemes can be any of the two, open-ended or closed-ended schemes. Classification of such schemes has been done as follows:

VSRK Growth/Equity Oriented

Growth or Equity-oriented Schemes

Main aim of growth schemes is to offer capital appreciation in the medium to long run. As the name dictates, these schemes make major investments in equities. Since the investments are done in equities, they have higher risks. Such schemes offer several options such as dividend option, growth option, etc. According to their goals and risk tolerance, investors can choose a suitable option. Investors are required to indicate their option in an application form. Some MFs allow investors to change selected options later. These schemes are suitable for investors who have a long-term outlook and who seek capital appreciation over a period of time.

Income or Debt-oriented Schemes

As the name explains, the main aim of these schemes is to offer regular and steady income to investors. Therefore, these schemes invest money in fixed-income securities including bonds, corporate debentures, government securities, money-market instruments, etc. In comparison to equity schemes, they are less risky. However, scope of capital appreciation is limited in such schemes.

NAVs of these schemes change due to changes in interest rates. When interest rates fall, their NAVs tend to go up in the short run and vice-versa. Long-term investors can ignore these minor fluctuations.

VSRK Income/Debt Oriented
VSRK Balanced/Hybrid Scheme

Balanced/Hybrid Schemes

Balanced schemes aim to provide both growth and regular income to their unit-holders. Therefore, these schemes invest both in equities and fixed income securities. Investments are made according to proportion written in offer documents. Such schemes are apt for investors who look for moderate growth. Balanced hybrid schemes should invest ~40-60% in equity or debt. Aggressive hybrid schemes need to invest ~65-80% of corpus in equity, while ~20-35% can be invested in debt. Such funds can be affected due to fluctuations in share prices. NAVs are less volatile against pure equity funds.

Money Market/Liquid Schemes

Such schemes are also known as income schemes as focus is on offering easy liquidity, capital preservation and moderate income. Such schemes make investment in short-term instruments including T-bills, CDs, commercial paper (CP) and inter-bank call money, etc. Returns don’t fluctuate much in comparison to other schemes. These funds are suitable for corporate and individual investors if they want to keep surplus funds for shorter time horizon.

VSRK Money Market or Liquid
VSRK Gilt Funds

Gilt funds

Such funds make investments exclusively in government securities (G-Secs). These securities carry zero default risk. NAVs tend to fluctuate because of changes in interest rates and other factors like in income/debt-oriented schemes.

Index funds

These funds tend to replicate portfolio of a particular index like BSE Sensex, NSE Nifty, etc. Index funds invest in securities in similar proportion as comprised in an index. NAVs will fluctuate according to the fluctuation in index. However, NAVs don’t fluctuate by same percentage because of factors called as “tracking error”. Relevant disclosures are made in offer document of MF scheme.

VSRK Index Funds

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