A mutual fund is a professionally run investment option that can give an investor access to diversified portfolios with very little initial capital. Mutual funds are generally run by asset management companies who manage equities, bonds and other types of securities. It has to be understood that there are different types of Mutual funds and as an investor, you would need to intelligently differentiate in order to choose the right investment. Here are some brief overviews of the different types of Mutual Funds and their risk assessments in relation to the kind of portfolios you are hoping to build, as an investor.
Which type of mutual fund is the best fit for you?
Equity funds are based on medium to long-term. There is very high risk attached to these types of investments because they are dependent on market fluctuations. Equity funds are also the largest bracket inside the mutual fund ecosystem because they comprise of different types of equities that are attached to different companies with small to large market caps. The investment should be made with long-term capital growth in mind. Equity funds generally specialise in giving the investor a specific style of approach into investing itself. Two important approaches in this regard are growth funds and value funds. Growth funds concentrate on the stocks of a very specific company profile that have very strong growth projections. Value funds make sure to pick out companies which are low growth. Between these two, there are also other investment strategies that try to capitalise on real-time fluctuations in the stock market and force profits. As an investor equity funds will only interest you if you are a risk taker.
Balanced funds are part of asset allocation family which takes into consideration the investor’s preferences and allocates his money in a portfolio that is variably mixed in stocks, bonds and securities to accommodate the investor’s risk preference. Balanced funds, however, do not deal with variable asset classes. They are about a fixed blend of stocks and bonds that specialise in companies that have largely fixed incomes. The reasoning is to make the investor privy to a stable capital growth while at the same time garnering a little bit of aggression in the investment itself. Balanced funds usually favoured by retirees who have a low tolerance for market risks.
Capital Protection Funds
Volatile markets make many an investor apprehensive about his/her investments. Capital Protection funds were designed with the risk-averse in mind. The structure of the scheme itself is devised in such a manner that the initial capital the investor has put in will not be lost to the market while capital appreciation from equity related investments is actually possible. With a very small part of the investment concentrating on equity and a large portion aligned towards debt. The idea of such a structure is to shield the investment itself from market forces like interest rate movements, market losses etc. However, before taking up such an investment structure, investors should be aware that Securities and Exchange Board of India (SEBI) has specified that Capital Protection funds will have no guaranteed returns.
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These are closed-end funds, meaning, a stratified investment portfolio with a manager overseeing it, which can later be dealt in the market like a stock. A sectoral fund is essentially a closed-end offering that specialises on business entities that operate out of a certain sector of the domestic economy. Sectoral funds are for proactive investors who have a keen eye for knowledge acquisition. This is because high profits can be made from sectoral funds when economic demand increases for the products the invested businesses produce. On the other hand, heavy losses can also be procured if the said businesses are facing stagnation or slow growth. Sectoral funds are a safe investment as long as investors are aware of where the market is heading and can successfully predict where it will be tomorrow.
Open-End funds pose no restrictions on the number of shares the fund issues to new investors. The idea is to create an open ecosystem where buying shares will create new ones and cashing in on one will take it out of circulation. An open-end fund is easily accessible to investors because of its low-cost ceiling. The demand for the shares will be based on their Net Asset Value (NAV) which will be calculated by the end of trading day. Open-end funds offer a way to build diversified portfolios that are accessible to most people and has the potential to deliver profit as well. Investors interested in a mostly stable investment can find their muse with the Open-end Fund.
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Mutual funds are a good way to navigate the shares and bonds market in search of some profit. It offers multiple strategies to deal with the market according to your taste in risk mitigation. They offer diverse investment opportunities for every kind of investor while cutting through the monetary divide. At the end of the day, as an investor, understanding yourself is key to choosing the right kind of mutual fund scheme best suited to your profile. But as is the case with all investments, ultimately it is the investor’s responsibility to make informed decisions before venturing out on any investment. We would advise our readers to educate and keep themselves updated on the latest trends and best practices from the investment world on our blog page.
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