Tag: Mutual Fund

What is Diversified Portfolio and how to create it ?

Posted on by Jagoinvestor

Today we will discuss How to build a Diversified Portfolio and hence and strong portfolio and why we need it? If you don’t understand a lot of terms and terminologies related to investing and finance, have a quick look at terms and terminologies page to quickly understand the terms. it will take 5 minutes.

Diversified portfolio

What is Portfolio?

Your investments all together is your portfolio, as simple as that. So, if i have

  • 10,000 in shares
  • 20,000 in real estate
  • 1000 cash

that’s my portfolio

What is an Asset Class?

An Asset class is something where we can invest and build assets. If i buy a Home or land, i build an asset in real estate category, if i buy anything in shares or mutual funds (equity), i create assets in Equity asset class.

(Dont know what is mutual fund, click here)

They are just categories. Following are some asset classes:

  1. Equity : Shares, Equity Mutual funds, Derivatives (Future and Options)
  2. Debt : Fixed Deposits, PPF, NSC, FMP (How to find the best Fixed Deposit)
  3. Real Estate : Land, Flat, Commercial Plots, Home
  4. Commodities : trading in commodities, leave it if you don’t understand
  5. Gold or Silver : Recently these are also counted as Asset classes
  6. Cash : that’s the hottest thing 🙂

Now what is a Diversified Portfolio?

As the heading says, Diversified portfolio is a portfolio which is not heavily invested in some asset class, but has balance over every asset class, There is no thumb rule that what percentage of your portfolio shall go in which asset class. It depends purely on :

  • What is your Risk appetite
  • Goals (short , medium and long term)
  • Economy and Political atmosphere
  • Current market over long term

Why Diversification?

When you diversify you investments over different asset class, not only your money gets diversified, but also risk, so if some particular asset class is not performing well, it will affect only that part of your portfolio and not whole of it.

Obviously it also effects the returns, you returns are collection of returns from all the asset class, so even if some asset class did not perform over a period, it doesn’t affect you hardly.

Watch this video to know how to diversify your portfolio:

Every asset class provides some thing like :

  • Equity : Very High returns , Volatility , Liquidity
  • Debt : Low but Secure returns , No liquidity
  • Real Estate : Good returns , stability , No liquidity
  • Gold : Hedge against inflation , Stability
  • Cash : High liquidity

Every asset class provides some thing good and some thing bad . Diversification helps in getting all benefits in some or the other way and being at the center of all. With diversified portfolio you get all the elements of : Good returns, Stable returns, Liquidity, Security

Lets see some examples :

1. Anyone who was heavily invested in “Debt” around 2003-2004 didn’t get high returns from the zooming stock markets (equity) for 4-5 yrs

2. Anyone who was heavily invested in Equity around start of 2008, saw his investments go down by 40-60%.

3. Anyone who is totally invested in Debt cant get instant money if required, either he has to take some loan over those investments or break his PF or FD etc.

That does not mean, non-diversification always hits …

1. Anyone heavily invested in Equities before the bull run of stock markets in 2003 onwards made fortunes (but at their risk).

2. And people who had most of there money in GOLD in 2007 got the highest returns compared to any asset class.

3. It totally depends on person to person. I hope this point is cleared. Also , inside every asset class , another level of diversification is important. Like in Equity there are different categories like Large Cap , Mid Cap , Small Cap . Read Magic of SIP

In Mutual funds there are sectoral funds , equity diversified , balanced funds , debt funds , liquid funds etc . Another level of diversification is also necessary to achieve high level of diversification .

Case study

Ajay a software engineer earning Rs 35,000 monthly (post tax) with a Family of 3 (1 wife and 1 kid) has following portfolio

Expenditure : 20,000 per month

Portfolio :

  • Tax savers Mutual funds : 1 lacs (locked for another 2 years)
  • Real Estate (a land in his native place , pahari in UP) : 3.75 lacs
  • Fixed Deposits (for 5 years) : 2 lacs
  • PPF : 3 lacs
  • Cash (in bank) : Rs 25,000
  • Insurance Payout : He pay 55,000 per year as life insurance premium for an endowment policy, for which he is insured for 12.5 lacs for 20 years. he started this policy before 4 years.

His Future plans

1. His goals are to buy a home in another 5 years for which he need down payment of 3-4 lacs
2. Want to save 10 lacs for his son education in 10 years
3. He want to retire early with monthly income of 45,000 at least . Read 6 steps of retirement Planning .

This Portfolio looks like diversified, and yes it is, but not in a well mannered way.
The asset wise allocation is

* Equity : 10%
* Debt : 37.5%
* Real Estate : 50%
* Cash : 2.5%

His overall Portfolio Shortcoming

  • His exposure to different asset class is not well balanced according to his over all situation
  • Life insurance is very less and and not at all enough . For this he is paying a hefty amount every year which adds a lot to his burden.
  • His Equity Allocation needs to go up
  • And Debt allocation needs to go down
  • His cash needs to go up for liquidity. none of his investments in any asset class provide liquidity or near term liquidity, If he needs 1 lacs suddenly he cant get it, or will get it after breaking his FD.

Read a Nice article on Power of Asset Allocation .

Suggestions :

The first thing he must do is to restructure his portfolio.

1. He shall surrender his existing Endowment policy and take a Term Insurance 35-40 lacs for 20 years for which he will pay around 13000-14000 per Annam. he will save surplus of 40,000 per year because of this.Also when he surrenders the policy he will get back around Rs. 2.4 lacs back.

2. He must invest more in Shares and Mutual funds (as his risk taking capabilities is more because of his less age and less dependents)

3. The land in his native place is not appreciating in value much faster unlike other places like other real-estate hot spots. He shall consider buying his home sooner and sell his land at native place. if he sells his land he will get around 4 lacs.

4. With the money he gets from surrendering policy (2.4 lacs) and selling his land (4 lacs), he will get around 6.4 lacs and he should utilize this money as the down payment for new flat and rest he can take as Home Loan. (Want to know how EMI on home loan is calculated? click here ) He can do it later if he wants (when he can afford the monthly EMI)

5. He shall consider increasing his Cash to a level which can meet his contingent needs if any arised.

As per the standard rule, he shall have at least 2 to 3 times of his monthly expenses as contingency fund, which is totally liquid.

6.Also apart from Cash and investing in Tax saver mutual funds, he shall consider investing in some non-tax saver mutual funds which also gives him near liquidity.

7. He may leave the debt investments as it is. If he wants he can break his FD in case he is going for the Home loan, he can increase the down payment part from this money.

8. In case he is going to take home loan after 1 year , he can also take some loan on his PPF , at least for some part he will pay less interest than the home loan.

9. Also he shall invest some money in GOLD, to give more stability and security to his portfolio.

10. At last he shall consider taking a Family floater Health Insurance plan, which helps him to secure his Family from and health problems or illness.

Recommended Portfolio

Apart from His Home (considering he takes Home soon)

  • Equity 65% ( Direct shares 20%, Equity Funds 60%, Balanced Funds 20%)
  • Debt 20%
  • Gold (ETF) 10%
  • Cash 5%

Conclusion

Diversification does not say that you have to invest in some money in every asset class for sure, the idea behind it is just that the risk is minimized by diversification and the portfolio is more stable. Happy diversifying 🙂 and Leave comments …

All Tax Saving Mutual funds are not same !!!

Posted on by Jagoinvestor

All Tax Saving Mutual funds are not the same !!!

This post targets those who already know ELSS or Taxsaver mutual funds. But many people do not know that not all ELSS are the same.

tax saving mutual fund

They might know that Tax saver funds are Diversified Equity Mutual funds, yes they are !!! But still, they can be differentiated in the category of :

Aggressive Tax savers :

These are the ELSS who bet more on small-cap and mid-cap, stock and hence have more return potential.

Safe and balanced Tax savers :

They heavily bet on Large Companies, which are more safe then mid-cap or small-cap stocks.

A person who wants to invest in ELSS shall not put money in just 1 ELSS, but 2-3 different ELSS. Again Putting all money in the same type of ELSS is not good, as they will be of the same portfolio type ( i mean more stake in Huge companies and less in Mid and Small-cap)

Rather, they shall put money in ELSS both types.

Let us see some top-performing Mutual funds and their category:

Aggressive ELSS:

1. Birla Equity Plan – D
2. DSPML Tax Saver -G
3. Principal Personal Tax Saver

Safe ELSS:

1. HDFC Taxsaver
2. HDFC Long Term Advantage
3. SBI Magnum Tax gain

source: https://www.valueresearchonline.com

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Types of mutual funds – Which every investor should know before investing

Posted on by Jagoinvestor

Do you know about the types of mutual funds you are going to invest in?

A lot of people are unaware of these different types of mutual funds even though they invest in it on a regular basis. Every mutual fund investor either he is beginner or regular must know about the categories in which mutual funds are classified in order to generate a good return.

In this article I will tell you 10 different categories of mutual funds which will be helpful for you to improve your investment portfolio.

types of mutual funds

Mutual Funds

You must be aware of what are mutual funds. If not the click here to read the basics of mutual funds.

A mutual fund is the advance tool of investment which has a large number of investors. These funds are classified into different categories based on the goal of investors.

Let’s see the categories of mutual funds.

Types of Mutual Funds

Mutual funds are categorized on the basis of their objectives, style, and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.

The different types of mutual funds are enlisted below:

  1. Diversified Equity Funds
  2. Tax saving Funds (ELSS)
  3. Balanced Funds
  4. Sectoral Funds
  5. Mid Cap and Small Cap Funds
  6. Index funds
  7. Exchange-Traded Funds
  8. Fund of Funds
  9. Debt Funds
  10. Liquid Funds

Watch this video to know more about the types of mutual funds:

1. Diversified Equity Funds :

These are those mutual funds which invest across all sectors and diversify their portfolio. They invest in large companies to small companies. Which results in wide diversification. It helps in spreading risk across all sectors and return potential is very good.

2. Tax saving Funds (ELSS) :

These are a special category of mutual funds which are tax saving funds called ELSS (Equity Linked Saving Schemes). These have a lock-in period of 3 years. They are Diversified mutual funds in nature.

3. Balanced Funds :

These are the funds that put money in Equity and Debt in some balanced proportion. Balanced does not mean 50:50, it may happen that they put money in the ratio of 70:30 or 60:20 or may be 80:20 … but the ideal ratio would be 50:50. It depends on market conditions.

In a very fast booming market, a fund with 7:30 mat is a balanced one. And in a bearish market, a combination of 50:50 may be considered are an aggressive fund. These funds have low risk and low return capacity in comparison with normal equity funds.

4. Sectoral Funds :

These are Funds that invest all its money in companies of a particular sector or a bunch of sectors related to each other. The reason for this is high faith in the sector for growth and return potential because of which these funds are very risky and have high return potential.

For example Reliance Diversified Power Fund.

5. Mid Cap and Small Cap Funds :

These funds are those funds that invest their money in Midcap Stocks or small Cap stocks … Mid-cap and Small Cap companies are companies categorized by there market capitalization.

  • Large Cap: greater than $10 billion
  • Mid Cap: Between $2 and $10 billion
  • Small-Cap: Less than $2 billion

Mid-cap and Small Cap stocks are riskier as they are small compared to large Cap stocks because of size and reachability in the market. They also have huge potential for growth so they can give superb returns too. For eg:

“Sanghvi Movers” gave a return of around 4500% in 5 years from 1992 – 1997. An investment of Rs 1 Lac was worth Rs 45 lacs in just 5 years.

In the same period “Jindal Power and Steel” gave a return of 20000 %. So an investment of Rs 50,000 was worth Rs 1 crore in just 5 years.

6. Index funds :

Index Funds are mutual funds which mirror a particular mutual fund. They put their money in the companies which are part of that index and in the same proportion as per the weightage of the company in that index. For Eg:

Franklin India Index Fund which tracks S&P CNX Nifty Fund will invest in companies in that fund in the same ratio as their weights. Suppose following is the weightage table for index:

Reliance 10%
Infosys 8%
Wipro 8%
…..
…..
Ranbaxy 3%

Then the fund will also invest in these companies’ stocks in the same proportion. The NAV’s of these mutual funds increase or decrease in the same way as the index. if the index will grow by 2.4% then NAV will also increase by 2.4 %.

7. Exchange-Traded Funds :

ETFs are just like Index funds with some differences, ETFs are a mix of a stock and an MF in the sense that

  1. Like ‘mutual funds’ they comprise a set of specified stocks e.g. an index like Nifty/Sensex or a commodity e.g. gold; and like equity shares they are ‘traded’ on the stock exchange on a real-time basis
  2. ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MFs.
  3. Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)

8. Fund of Funds :

These are mutual funds that invest in other mutual funds. They put money in different mutual funds in some proportion depending on their goals and objectives.

9. Debt Funds :

Debt funds are mutual funds that have their major holdings in secure and fixed income instruments like Fixed deposits, bonds. They also put a small proportion of Equity (High risk, high returns). These are secure in nature and provide low returns.

10. Liquid Funds :

Liquid funds are used primarily as an alternative to short-term fix deposits. They invest with minimal risk (like money market funds).

Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. Liquid funds score over short term fix deposits.

Conclusion –

I hope you have become aware of all these types of mutual funds and now you can improve your investment by considering the funds according to your goal of an investment.

If you have any doubt you can leave your query in the comment section.

Advantages and Disadvantages of Mutual Funds

Posted on by Jagoinvestor

Before investing in mutual funds an investor should understand if it suits his requirement of not. Therefore one should go through all the advantages and disadvantages of mutual funds.

Advantage and disadvantage of Mutual funds in India

Advantages of Mutual Funds

  • Management: One of the biggest advantage is that in very low cost the investor gets his investment managed by experts. If they want to get the services solely for their investment , it can be very expensive but by investing in MF they can take advantage of the scale.
  • Scale Advantage : The transaction costs of a single individual is very less because mutual funds buy and sell in big volumes.
  • Diversification: With mutual fund investment your money gets diversified in a lot of things, which helps in minimizing the risk factor. Also if one particular sector doesn’t perform well the loss can be compensated with profits made in other sectors.
  • Liquidity and Simplicity: You can sell or buy mutual funds anytime. So mutual funds are good if you want to invest in something which you can liquidate easily. Also, MF is very simple to buy and sell.

Disadvantages of Mutual Funds

  • Risks and Costs: Changing market conditions can create fluctuations in the value of a mutual fund investment. Also there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.
  • No Guarantees: As Mutual funds invest in debt as well equities, there are no sure returns . Returns depends on the market conditions .
  • No Control: Investor does not have control on investment , all the decisions are taken by the fund manager. Investor can just join or leave the show.

4 Common myths about Mutual funds

Posted on by Jagoinvestor

There are many common myths about Mutual funds. Common investors do not apply their thinking a lot of times and agents/sellers of products a lot times are successful in taking advantage of this and cheat them .

Lets see some of the common myths associated with mutual funds below .

mutual fund myths

1. A Mutual fund with low NAV is better than other MF’s with high NAV.

This fallacy is due to the fact that investors perceive the NAV of a mutual fund (MF) as similar to the price of equity shares. Comparison of NAV of MF unit and Share price

NAV = (market value of all the shares held in the portfolio + Cash – Liabilities)/ total number of units

Share Price = combination of company’s fundamentals, demand-supply, public perception about the company + other complicated things

It is Funds Quality , Fundamentals and values that determines your returns and not NAV , its just the “book value” of the unit.

Example : Consider Fund A with NAV Rs 100 and Fund B with NAV Rs 5 . Both has corpus of Rs 10,00,000, Fund A has good fundamentals and is better mutual fund in terms of strategy compared to Fund B. After 1 year say their return is 40% and 30% as expected. So the NAV for A will be 140 and for B will be Rs 6.5 and fund A will give better returns compared to fund B.

The point to understand is its the strategy and the asset allocation which matters. Low NAV can only get you more units and nothing else 🙂

2. Mutual funds with good Past Performance are best choice

This is a common misconception among the Mutual funds investors that funds which have performed very well in past are the best choice . People believe that if a ABC mutual fund has given 60% return in past year and XYZ has given 45% return , then ABC is a definite choice this year also.

They should understand that performance over 1 or 2 years have very little to say about them. They must analyse performance over 4-5 years atleast to understand how a mutual fund has performed.

You can watch this video given below to know more about performance analysis:

3. NFO’s give better returns

NFO’s are more risky than the existing mutual funds as they don’t have no track record to compare. There is no advantage with NFO when it comes to investments , they have no extra magic. A NFO must be generally avoided until they have very strong strategy and unique and strong idea.

4. Putting money in lots of mutual funds will help

As a rule of thumb , no one should have more than 5-6 different mutual funds . and even those must be different kind of mutual funds . People buy 20-30 mutual funds and don’t see that all of them are of similar nature and with same kind of strategy. All of them have same kind investment portfolio. They should put money in some limited mutual funds and all should be of different type.

They can buy:

  • tax-savers with aggressive strategy
  • tax saver with balanced aggressiveness
  • 2 sectoral funds
  • balanced fund
  • Some special fund (like special situation fund)
  • ETF

Read terms and terminologies

So these are the 4 most common myths that every beginner investor have while investing in mutual funds. Once you start your investments in mutual funds there are lot of things you should know about it to maintain a healthy portfolio and generate a good return.

Let us know if you have any query regarding mutual funds by leaving your reply in the comment section.

Understand all the basics of Mutual funds

Posted on by Jagoinvestor

Lots of people believe in investing their money in traditional investment tools, because of the concern of security. You must have seen your parents investing in FD and RD, which are considered as safe tools of investment. But now a days, lot of investors are choosing a trending tool of investment i.e. Mutual funds.

But before investing in MF, one should know all the basics of mutual fund. Most people still don’t know what is mutual fund. They are not clear about even the basics of MF’s in India as an investment instrument.

Through this article, I will try to answer all the questions related to mutual funds.

Basics of mutual funds

Mutual fund is an advanced, low cost and tax efficient tool of investment.

There are thousands of mutual funds in India which are almost similar to each other and this created confusion among investors; some of the examples of MF’s are Fidelity mutual funds, SBI mutual funds or Reliance mutual funds.

Here is a video on basics of Mutual Funds which will help you understand some facts about MF’s in easy manner. Let’s first understand from very basic which will be helpful of a person totally outside the personal finance space.

To know MF in detail, you must understand all the related factors like what is company, what are shares, how mutual funds are classified etc. So let me explain you each term in detail.

What is Company?

Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. These company needs to be registered under The Companies Act, 1956, however, company is not a citizen so as to claim fundamental rights granted to citizens.

What are Shares?

To put in simple terms, it’s a share in a company. So it can be a very minuscule part of ownership in some company.

For Example, if someone has 100 shares of Rs.100 each for Company XYZ, it means that he has invested that much money in that company and is owner for that much part, which is commonly called as “stocks” and “equities.”

As we have got some understanding of what are these terms, we can proceed further:

Now anyone who has good knowledge of Stock markets, good knowledge of analyzing the company performance, buying and selling of shares, timing the market, etc. can directly buy and sell shares and do the investment directly in stock market.

But there are people who have no good understanding of these things and they can’t take good decisions themselves, for them MF comes into picture.

Mutual Funds Pool the money

So, MF is a financial instrument that allows a group of people to pool their money to build a huge corpus, and then this money is invested by group of people (refereed as FUND MANAGERS), who are investment experts, have deep understanding of investing in stock market and overall financial markets.

All the mutual Funds have their Units just like “shares” in Company. So if someone wants to invest Rs.10,000 in ABC MF and price for a unit is Rs.10, he gets 1000 units of ABC MF, and over a period of time as the MF investment grows, the unit price also grows with almost same ratio.

mutual funds

The price of these units is referred as Mutual Funds NAV (Net Asset Value). When a new MF launches, it’s called NFO of Mutual Funds (New Fund Offer, just like IPO in case of new Company’s Share issue to public)

So for example the total corpus of the MF on 1/1/2007 was Rs.100,000,000 and per unit price was Rs.10. and after an year on 1/1/2008 the total investment has grown to Rs.134,000,000, the unit price will be now Rs.13.40 (approx. it may be little less as there are some administrative cost and other expenses to be incurred).

Classification of Mutual Funds

A mutual fund can invest your money in different kind of tools like shares, debentures, gold, Fixed Deposits and cash also. So based on where it will invest and what kind of risk it will take there are 2 different ways of classifying mutual funds.

#1 Open end or Close Ended mutual Funds

One way of classifying mutual funds can be close ended and open ended funds. An open ended mutual fund is open at all time for entry and exit. So one can invest in it anytime and can get out of it anytime.

Whereas, in a close ended fund, there is a specified entry time and exit time and it comes with duration.

mutual funds types

#2. 10 types of Mutual Funds

Mutual funds are categorized on the basis of its objectives, style and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.

The different types of mutual funds are enlisted below:

  1. Diversified Equity Funds
  2. Tax saving Funds (ELSS)
  3. Balanced Funds
  4. Sectoral Funds
  5. Mid Cap and Small Cap Funds
  6. Index funds
  7. Exchange Traded Funds
  8. Fund of Funds
  9. Debt Funds
  10. Liquid Funds

1. Diversified Equity Funds :

These are those mutual funds which invests across all sectors and diversify their portfolio. They invest in large companies to small companies. Which results in wide diversification. It helps in spreading risk across all sector and return potential is very good.

2. Tax saving Funds (ELSS) :

These are special category of mutual funds which are tax saving funds called ELSS (Equity Linked Saving Schemes). These have a lock in period of 3 years. They are Diversified mutual funds in nature.

3. Balanced Funds :

These are the funds which put money in Equity and Debt in some balanced proportion. Balanced does not mean 50:50 , it may happen that they put money in ratio of 70:30 or 60:20 or may be 80:20 … but the ideal ratio would be 50:50. It depends on market conditions.

In a very fast booming market, a fund with 7:30 mat be a balanced one. And in a bearish market a combination of 50:50 may be considered are an aggressive fund. These funds have low risk and low return capacity in comparison with normal equity funds.

4. Sectoral Funds :

These are Funds which invests all its money in companies of a particular sector or a bunch of sectors related to each others. The reason for this is high faith in the sector for growth and return potential because of which these funds are very risky and have high return potential.

For example: Reliance Diversified Power Fund .

5. Large cap, Mid Cap and Small Cap Funds :

These funds are those funds which invest there money in Mid cap Stocks or small Cap stocks … Mid cap and Small Cap companies are companies categorized by there market capitalization.

  • Large Cap : greater than $10 billion
  • Mid Cap : Between $2 and $10 billion
  • Small Cap : Less then $2 billion

Mid cap and Small Cap stocks are more riskier as they are small compared to large Cap stocks because of size and reachability in market. They also have huge potential for growth so they can give superb returns too. For eg:

“Sanghvi Movers” gave a return of around 4500% in 5 years from 1992 – 1997. An investment of Rs 1 Lac was worth Rs 45 lacs in just 5 years.

In the same period “Jindal Power and Steel” gave return of 20000% . So investment of Rs 50,000 was worth Rs 1 crore in just 5 years.

6. Index funds :

Index Funds are mutual funds which mirrors a particular mutual fund. They Put there money in the companies which are part of that index and in same proportion as per the weightage of the company in that index. For Eg:

Franklin India Index Fund which tracks S&P CNX Nifty Fund will invest in companies in that fund in the same ratio as their weights. Suppose following is the weightage table for index:

Reliance 10%
Infosys 8%
Wipro 8%
…..
…..
Ranbaxy 3%

Then the fund will also invest in these companies stocks in same proportion. The NAV’s of these mutual funds increase or decrease in the same way as the index. if index will grow by 2.4% then NAV will also increase by 2.4% .

7. Exchange Traded Funds :

ETFs are just like Index funds with some differences, ETFs are a mix of a stock and a MF in the sense that

  1. Like ‘mutual funds’ they comprise a set of specified stocks e.g. an index lik Nifty/Sensex or a commodity e.g. gold; and like equity shares they are ‘traded’ on the stock exchange on real-time basis
  2. ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MFs.
  3. Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)

8. Fund of Funds :

These are mutual funds which invests in other mutual funds. They put money in different mutual funds in some proportion depending on their goals and objectives.

9. Debt Funds :

Debt funds are mutual funds which have their major holdings in secure and fixed income instruments like Fixed deposits , bonds . They also put a small proportion in Equity (High risk , high returns). These are secure in nature and provide low returns.

10. Liquid Funds :

Liquid funds are used primarily as an alternative to short-term fix deposits. They invest with minimal risk (like money market funds).

Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. Liquid funds score over short term fix deposits.

 

Watch the video given below to know about mutual funds schemes in detail.

Balanced mutual funds are those funds which invest in both equity and debt in a balanced ratio (like 60:40 or 50:50 for example).

Advantages and Disadvantages of Mutual Funds

Before investing in mutual funds an investor should understand if it suits his requirement of not . Therefore one should go through all the advantages and disadvantages of mutual funds .

Advantages of Mutual Funds

Management: One of the biggest advantage is that in very low cost the investor gets his investment managed by experts. If they want to get the services solely for their investment , it can be very expensive but by investing in MF they can take advantage of the scale.

Scale Advantage : The transaction costs of a single indivisual is very less because mutual funds buy and sell in big volumes.

Diversification : With mutual fund investment your money gets diversified in a lot of things, which helps in minimising the risk factor. Also if one particular sector does’nt perform well the loss can be compensated with profits made in other sectors.

Liquidity and Simplicity : You can sell or buy mutual funds anytime. So mutual funds are good if you want to invest in something which you can liquidate easily . Also MF are very simple to buy and sell .

Disadvantages of Mutual Funds

Risks and Costs: Changing market conditions can create fluctuations in the value of a mutual fund investment. Also there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.

No Guarantees: As MF invest in debt as well equities , there are no sure returns . Returns depends on the market conditions .

No Control: Investor does not have control on investment , all the decisions are taken by the fund manager. Investor can just join or leave the show.

I am sure this must have given you a good enough idea of basics of Mutual Funds in India and a general idea of types of mutual funds. In case you have any comments or any query, please leave your message in the comment section.