A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.
Mutual funds are divided into several kinds of categories, representing the kinds of securities they have targeted for their portfolios and the type of returns they seek.
The largest category is that of equity or stock funds. As the name implies, this sort of fund invests principally in stocks. Within this group is various sub-categories. Some equity funds are named for the size of the companies they invest in small-, mid- or large-cap. Others are named by their investment approach: aggressive growth, income-oriented, value, and others. Equity funds are also categorized by whether they invest in domestic (U.S.) stocks or foreign equities.
Another big group is the fixed income category. A fixed income mutual fund focuses on investments that pay a set rate of return, such as government bonds, corporate bonds, or other debt instruments. The idea is that the fund portfolio generates interest income, which then passes on to shareholders.
Another group, which has become extremely popular in the last few years, falls under the moniker "index funds." Their investment strategy is based on the belief that it is very hard, and often expensive, to try to beat the market consistently. So, the index fund manager buys stocks that correspond with a major market index such as the BSE Sensex or NSE Nifty. These funds are often designed with cost-sensitive investors in mind.
Balanced funds invest in both stocks and bonds to reduce the risk of exposure to one asset class or another. Another name for this type of mutual fund is "asset allocation fund." An investor may expect to find the allocation of these funds among asset classes relatively unchanging, though it will differ among funds. This fund's goal is asset appreciation with lower risk. However, these funds carry the same risk and can be as subject to fluctuation as other classifications of funds.
There is a fund for nearly every type of investor or investment approach. Other common types of mutual funds include money market funds, sector funds, alternative funds, smart-beta funds, target-date funds, and even funds-of-funds, or mutual funds that buy shares of other mutual funds.
A gold fund is a type of investment fund that holds assets related to gold. The two most common types of gold funds are those holding physical gold bullion, gold futures contracts, or gold mining companies. Gold funds are popular investment vehicles among investors who wish to hedge against perceived inflation risks.
A lump sum investment is when the depositor invests a significant sum of money on a particular mutual fund scheme. Lump sum investments are particularly preferred by a majority of investors, as there are lesser variables involved and returns are generally on the higher side.
A systematic transfer plan allows investors to shift their financial resources from one scheme to the other instantaneously and without any hassles. This transfer occurs periodically, enabling investors to gain market advantage by changing to securities when they offer higher returns. It safeguards the interests of an investor during market fluctuations, to minimize the damages incurred.
Systematic Investment Plan (SIP) is a method of investing in mutual funds wherein an investor invests the fixed amount of his choice at fixed intervals. SIP investment plan is about investing a small amount over time rather than investing one-time huge amount to take advantage of value cost averaging.
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