To avoid the risk of losing money in the stock market, one may park his/her money in mutual funds; before investing, one must know the types of mutual funds available.
Let us have a succinct look at the types mutual funds available-
1. Equity Funds– These are meant for investors, who are ready to take higher risk to maximize return. These are also called stock funds. They predominantly invest in company stocks; therefore, they are characterized by high risk. It may invest in small, medium or large cap companies, which is determined by the market capitalization of the company. Again, the portfolio manager may assume different style of investment i.e. value, growth or blend.
As the portfolio of these funds reflects the preponderance of company stocks, the return on equity funds largely depend on the stock market conditions. Capital appreciation in the long term is the primary objective of the stock funds.
2. Fixed Income Fund– FIFs are just the opposite of equity funds. Capital appreciation is not the focus of FIF. Here, security of the money invested assumes most of the importance. FIFs may invest in different types of debt instruments like corporate, municipal and government bonds.
They may also invest in unconventional debt instruments like mortgage-backed securities. Retired persons can park their money here. Most of the fixed income funds prefer U.S. government bonds for investment because it has the highest credit quality. Instead of putting money in a fixed deposit, one should consider investing in fixed income funds.
3. Money Market Fund– The objective of an MMF is to give a safe investment option to the investor. Money market funds, primarily, invests in money market instruments. The portfolio of the fund contains cash equivalent short-term liquid assets. The risk involved is very low for MMFs, and this is reflected in their low return profile.
Apart from these three primary types, there are some other types of mutual funds.
Sector Fund: It targets a particular industrial sector to invest.
International Fund: IFs invest in international assets.
Open Ended Fund: The fund house may issue and redeem fund units at any point in time depending on the demand for the fund.
Closed Ended Fund: Once issued the number of units cannot be increased later on by the fund managers. However, the units can be traded in a market at a premium or discount.
Index Fund: These funds create their portfolios keeping in mind the weight of different stocks in a benchmark index. Many index funds follow either S&P 500 or S&P CNX Nifty. The return on these funds almost exactly reflects the return of the benchmark index.
Hope this article helps the readers to understand, at least, the primary types of mutual funds, and their features.