Mutual Funds 101

When considering the alternatives to invest money, mutual funds are one popular choice for many investors. Before the individual invests, it is important to know what the options in the market are.

There are many kinds of mutual funds that fall into categories such as Equity, debt, gilt, balanced MIP's etc. All have a different approach to their investment style. Following is an explanation of the different types that exist. A type of fund characterized by high risk but high returns are called Equity Schemes. Overall, equities has been the foremost performing asset class, thus forecasting high returns. According to market requirements, there are several types of equity schemes on offer. Mid and small cap funds, though risky given the smaller size of the company, are capable of high returns if the company grows manifold. Large cap or blue chip funds invest in large companies resulting in reasonable returns given the relatively low risk. Yet another type of equity scheme is the index fund, where investments are made only in stocks that form the market index of any given index.

The riskiest of all equity schemes is the sector fund. As the name suggests, they invest only in specific sectors. Typically, the strategy is to ride the stuck while it grows and manage to exit before it falls. Obviously, timing is the key, hence the risk. Debt Schemes: Debt Schemes invest mainly in income bearing instruments such as bonds, debentures, government securities and commercial paper. This type of fund basically invests in FD like instruments that pay interest based on various market factors.

Its volatility depends on the economy reflected by factors such as the rupee depreciation, fiscal deficit and inflationary pressures. Broadly speaking, the returns from pure debt schemes will be in line with bank FDs.

There are short term, medium term and long term debt funds based on the time horizon they cater to. 1. Gilt Funds: This is a sub-type of debt funds, which invests only in government securities and treasury bills.

They are generally considered safer than corporate bonds and are more tuned towards long term investments.
2. Monthly Income Plans (MIPs): This is basically a debt scheme which invests a marginal amount of money (10%- 25%) in equity to boost the scheme's return. This fund will give slightly higher return than traditional long term debt scheme.
3. Money Market Funds (MMFs):

These are also known as Liquid Funds.

These funds are debt schemes that invest in certificate of deposit (CDs), Interbank call money market, commercial papers and short term securities with a maturity horizon of less than 1 year.

The funds objective is to preserve principal while yielding a moderate return.

It is a low risk- low return investment which offers instant liquidity.

In a more balanced approach fall hybrid schemes. these schemes are invested in both equity shares and income bearing instruments, thus reducing the risk of the stock market by backing it up with the debt market. Various combinations of weightage can be given to either equity or debt. Funds of funds, as their name suggests, are funds that invest in other funds depending on market factors. Exchange Traded Funds (ETFs):

These are the funds that are traded on the market like regular stocks.

You don't need to pay Exit load to trade them, but you pay brokerage just like regular stocks.

You can do intraday trading with ETFs, which is not possible with regular funds.

There are ETFs that are based on Nifty (index), Gold and so on. Generally speaking, they are suitable for short term traders who want to take a position in the market using underlying security.
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