Mutual Funds Basic Information

A Mutual fund is a trust handled by the fund manager that pools the savings of thousands of investors who share the same financial goals. The money collected is then invested in capital market instruments Such as Stocks or bonds, or a combination of the two.

Investing in mutual funds is done through the provision of different types of investing options that are made available to the investors. These fall broadly into the following categories: SIP (Systematic Investment Plan), One time payment, Yearly, half yearly and Quarterly Payments. SIP was essentially introduced to average out the cost of investment by purchasing a particular amount of units at regular intervals irrespective of market movement. This reduces the volatility of the fund. Thus if price of the security falls, more units are bought and if price of the securities rises lesser units are bought.

To Invest in Mutual Fund one should know the types of Mutual Fund Available in the market. These are: Equity funds, Debt funds, Balanced schemes, Sector funds, Gilt funds, Index funds, MIPs(Monthly Income Plans), MMFs(Money Market Funds) ETFs etc. Each one of these schemes follows a different investment strategy. Most of the schemes have "growth oriented" or "dividend oriented" plans, which either re-invest or pay out the dividend collected from underlying stocks.

Equity scheme: This kind of scheme invests in the shares of particular companies. The returns are provided to the investor as the performance of the company improves. Equity schemes are more of a high-risk investment but this also means a possibility of higher return. As shown to us by historical statistical data, even though equity schemes are high risk, they have outperformed any other method of investment in the returns that they have provided. There are various types of equity schemes that exist in the Indian markets. Following is a list of the different kinds of schemes that are available to investor for this kinds of a fund:

(1)Index funds: This kind of a mutual funds will track the main Indian stock markets and invest in only these stocks that belong to indexes that the key market indexes seem to focus on. The idea here is to replicate the average market index performance and try to beat it in some way. It usually doesn't take as much of an exit load for this kind of a mutual fund.
(2)Sector funds: As the name suggests, this type of a fund will focus on a specific sector on a specific industry. This type of a fund will try and capitalize on the happening so of a specific industry and will invest when an industry is at a low price per unit and is going to boom and will sell the stocks when a specific industry is expected to tank.
(3)Midcap or small cap funds: These kinds of funds are generally considered more risky as an investment since the investor is putting his or her money into companies that are not as established as the bigger companies. The return potential is higher here since these small cap or midcap companies have growth potential and therefore return potential for an investor that no large cap company can give in the same amount of time.
(4)(Blue chip funds: This kind of a fund usually invests in only the larger companies also called the blue chip companies. These companies are known for their brand and are therefore guaranteed returns but at a slower pace.

Debt Schemes: Debt schemes usually are known as more risk free than equity schemes. Debt works in a different way where the profit potential of the investor is limited, defined and consistent. On the other hand this profit potential has historically not been able to compare to equity schemes. Debt schemes invest in instruments such as fixed deposits or government bonds etc. The risk factor is lower in debt schemes and it depends on certain external factors such as interest rates, inflationary pressures and the fiscal deficit of a country. The debt funds available to investor are categorized by their time horizon namely, short term, medium term and long tem. Following are a list of the type of debt funds available to the Indian market of investors:

(1)Money Market funds: Also known as liquid funds, these kinds of funds invest mostly in Certificates of Deposits or CD' as they are commonly known. The maturity of this kind of fund is usually 1 year and they are invested in schemes such as Interbank Call money market and commercial paper.
(2)Monthly Income plans: Or also as they are commonly know as MIP's which invest a marginal amount of money, around 10%-25% in equity as a goal of boosting their return possibilities. This kind of a funds ha historically given a higher return than long term debt schemes that have existed in the market.
(3)Gilt Funds: This type of a fund invests only in government securities or treasury bills. This is commonly known as a type of investment that has a basic risk free return guaranteed over a stipulated period of time, which is usually 10 years.

Hybrid Schemes: This kind of a scheme adopts the principles of both debt and equity schemes. The aim is to reduce the amount of risk that the investor is taking and increase the profit potential at the same time. This type of a scheme usually gives a reasonable amount of return to the investor that is acceptable to the type of investor who invests in this kind of a fund based on their expectations.

Fund of Funds: This type of fun invests in different kinds of funds based entirely on prevailing market conditions. If the general mood in the market seems to be bearish or one of not buying, then this kind of a fund would advice the investor to invest in risk free debt kind of funds rather than equity. However, on the flip side, if the mood of the market is bullish, they would advice entirely to invest in equity. This kind if a fund will rely on the general market condition and ask the investor to invest accordingly.

ETF's or exchange traded funds as they are more commonly known: This kind of a fund is trade on the markets as a general fund. The investor does not need to worry about an exit load or a penalty to stop paying for the fund and cash out. You just pay the regular brokerage charges with this kind of a fund as an investor. ETF's extend to the gold index as well. This type of an investment is suitable to short term traders who are more positional in nature of investing or advising.