HomeMutual FundsHow to Analyze Mutual Funds and Their Types

How to Analyze Mutual Funds and Their Types

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An Investor wants to buy MRF shares with Rs. 1000.

Is it possible?

No, because MRF shares are trading at Rs. 100000. Here Mutual Funds come in handy. Mutual funds can provide you the opportunity to trade MRF shares with just Rs. 1000.

Mutual Funds provide an investment Opportunity where the money of many people is traded in any option like equity, debt, securities, or commodities.

Let’s understand this with MRF shares. You have Rs. 1000. There are 100 more investors who have the same amount and they also want to invest in MRF shares. So what exactly do Mutual Funds companies do, they collect money from all 100 people buy a stock of MRF, and give 1 unit to each person so a person owns 1/100 part of an MRF share. This is a Mutual Fund. As the name suggests, Mutual funds are funds gathered mutually.

Let’s understand this with MRF shares. You have Rs. 1000. There are 100 more investors who have the same amount and they also want to invest in MRF shares. So what exactly do Mutual Funds companies do, they collect money from all 100 people buy a stock of MRF, and give 1 unit to each person so a person owns 1/100 part of an MRF share. This is a Mutual Fund. As the name suggests, Mutual funds are funds gathered mutually.

For example, you have submitted Rs. 10,000 in a mutual fund and they invested your money in different sectors like agriculture, IT, Finance, power, etc. If any time the Agriculture sector is down then the rest will manage it and check the losses. It is a very unseen situation in the market when all sectors are down, chances are very low.

Mutual funds are of various types and are characterized based on structure, asset class, and investment goals.

1) Based on Asset Class

  • Equity Mutual Fund
  • Debt Mutual Fund
  • Hybrid Mutual Fund

2) Based on Structure

  • Open Ended Mutual Fund
  • Close-ended Mutual Fund
  • Interval Mutual Funds

3) Based on the Goal of Investment

  • Growth funds
  • Income funds
  • Liquid Funds
  • Tax Saving Funds
  • Capital Protection Funds
  • Pension Funds

4) Based on Investment Risk

  • High-Risk Funds
  • Medium Risk Funds
  • Low-Risk Funds

5) Other Specialized Fund

  • Sector-specialized Funds
  • Index Funds
  • International Funds
  • Emerging Market Funds
  • Global Funds
  • Commodity focused Stock funds

Based on Asset Class

Asset classes are a group of financial instruments that demonstrate similar behavior including Stocks, bonds, real estate, cash, and commodities. Assets class can be of different types:

Equity Mutual Fund
Equity funds are those Mutual funds that invest the majority of their money in equities like stocks. Since these funds are highly based on market movements, these funds are at higher risk as well as higher profit. Equity funds are a good choice If a person is planning for the long term as in short-term periods volatility is high. It is also divided into Large-cap, Mid-cap, and Small Cap Funds.

TypeRankMarket CapStability
Large Cap Companies(Funds)1-10020000 Cr+Less volatile and good Liquidity
Mid Cap Companies(Funds)101-2505000 Cr-20000 CrModerate Volatile and Moderate Liquidity
Small Cap Companies(Funds)250+Less than 5000 CrMore Volatile and less Liquidity

Debt Mutual Funds
Debt Mutual funds are those funds that generate money by providing loans to the government and organizations. They invest money in fixed-income securities like government securities, corporate bonds, and treasury bills. It provides fixed returns that’s why it’s less risky. Debt funds are one of the best ways to save tax as the dividend received from it is tax-free. But it has a condition that investors need to remain invested for 3 years.

Hybrid Mutual Fund
If you want to invest in both Equity and Debt funds or want high return and less risk associated with it, then a Hybrid or balanced Mutual fund is the best scheme. Hybrid funds invest your money in both equity and Debt. Profit and risk in Hybrid funds lie somewhere in between Equity and Debt. The high risk of equity is balanced with low risk of debt and the low returns of debt are maintained by high returns of equity.

Based on Structure

Open Ended Mutual Fund
Open Ended Mutual Funds are those funds that provide flexibility in buying and selling to investors at any time. They don’t have any maturity period or fixed lock on Entry or Exit. This property makes it more convenient to investors as it provides more liquidity and diversification. As it is more flexible, it contains some disadvantages like higher market risk due to fluctuations in price. An Investor should invest in Open Ended Funds according to its risk management and financial goals

Close Ended Mutual Fund
Close Ended Mutual Funds are those funds having a fixed Maturity period. These funds are more stable as compared to Open Ended Funds. They are immune to sudden movement in the market due to fixed maturity dates. You can buy units only when it is launched so an investor is mandated to make a lump sum investment. It is ideal for long-term investors.

Interval Funds
Intervals funds contain properties of Both Open Ended and Close Ended funds. Interval mutual funds restrict buying and selling to specific windows and remain closed for subscription or redemption outside of these periods. Additionally, a minimum holding period of two years typically applies upon purchase, during which no transactions are permitted.

Based on Goal of Investment

Growth Funds
Growth funds are those funds that primarily invest in equity stocks with the target of capital appreciation. They follow the policy of High Risk and High Returns. Returns are very high when the market is bullish but it is risky. If you are investing in growth funds then be ready to face the volatility of the market. Growth funds are generally attached to the growth of a company so it requires long-term investment.

Income Funds
Income funds are those funds that primarily invest in bonds, and securities and try to provide a stream of income to its investors by generating interest from bonds and deposits. Share prices of Income funds depend on Interest Rates. When Interest Rates rise, income funds fall, and vice versa. Low risk is associated with these funds so low returns as compared to Growth funds.

Liquid Funds
Liquid funds are debt funds for short-term Investment. They invest money in fixed-income instruments like commercial paper, government securities, treasury bills, etc. with a maturity of up to 91 days. Capital Protection along with liquidity is the core objective of Liquid Funds. Liquid funds are ideal for those investors who want to invest their money for a shorter duration. Liquid funds generally generate 7-9% returns which are better than the 4% returns of a savings account.

Tax Saving Funds
We all want to avoid giving tax. Almost all the investment options come under Tax policy. If you want to generate good returns and also want to get rid of tax, then ELSS(Equity Linked Saving Scheme) or Tax saving funds are the best option for you. They offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act.

If an Investor wants to invest his Rs. 50,000 in ELSS, then it would be deducted from his taxable income. The lock-in period is of 3 years, After that you can redeem your returns. SIPs and One-time investments up to Rs.1.5 lakh are the two options to invest in ELSS.

Capital Protection Funds
If you want to save your capital at any cost and also want to gain some returns then capital Protection Mutual Funds are the best option. Capital Protection funds came into existence after the 2008 financial crisis. These funds generally invest in equity and debts. The lock-in period here is 3 years. To save investor money from economic shocks is the core objective of capital protection funds.

Pension Funds
If you are planning retirement then Investment in pension funds is the best Investing option for you. Pension funds are generally targeted for long-term investing plans but you can withdraw them in advance too. The main objective of pension funds is regular income post-retirement.

Pension funds work in two stages: The accumulation stage and the vesting stage. In the Accumulation stage, the investor pays an annual premium until retirement. The vesting Stage starts after retirement, where retirees start getting an income until the death or the death of a nominee.

Based on Investment Risk

High Risk Funds
High-risk mutual funds are those funds that invest in stocks having high risk and high return capacity. These funds are highly volatile and require a long-term investment. Generally, these mutual funds invest in small and mid-cap stocks for high returns.

Medium Risk Funds
Medium Risk funds are those funds that primarily invest in Stocks and debts to provide stable returns to their investors. The average investment span here is 3 to 5 years. These Mutual funds are ideal for those who want a diverse portfolio and stable returns with less risk.

Low Risk Funds
If you want to nullify your risk and want a steady return then low-risk Mutual funds should be your ideal choice. Low-risk funds invest in debts including bonds, government schemes, etc. Volatility here is lower than high-risk and medium-risk funds.

Other Specialized Funds

Sector-specialized Funds
As the name suggests, Sector specialized funds are those funds that invest in a specific sector like pharmacy, IT, Agriculture, etc. According to SEBI guidelines, sector funds should invest at least 80% of their assets in specialized sectors. Rest can be invested in other securities like debt, bonds, etc. So an IT sector fund would be required to invest at least 80% of its assets in IT Stocks.

These Funds are generally volatile. Investors should invest in sector-specialized funds only if they are confirmed that this sector is going to grow in the upcoming time.

Index Funds
Index Funds are those funds that invest in stocks similar to indexes like Nifty 50, Bank Nifty, Nifty Small Cap, etc. If a fund is investing in Nifty 50 funds, it means they are following the stocks of Nifty 50. These funds are managed passively and are suitable for long-term investment.

International Funds
International Mutual funds are those funds that generally invest in stocks of companies outside of India. These funds help you to invest in some of the biggest companies in the world like Google, Facebook, Microsoft, etc. International Mutual Funds are better for long-term Investments of more than 5 years.

Emerging Market Funds
Emerging Market funds are those funds that primarily invest their assets in the securities of emerging markets like the market of developing nations. The most common nations are India, China, and Brazil. Emerging markets carry some risk because those markets are developing their economics, and may carry some market risk.

Commodity focused Stock funds
If you want to invest in commodities like gold, and silver then commodity-focused stock funds are the best funds for you. These Mutual funds are the best for those who want to diversify their portfolio. There are certain factors responsible for global economic conditions, weather patterns, technological advancements, and environmental regulations.

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