What is a Mutual Fund? Types of Mutual Funds

What is Mutual Fund & Types

A mutual fund, also known as MF, is a company which pools money from a range of investors and invests that pooled money into securities. These securities include stocks, bonds, and short-term debt. The word “portfolio” means combination of holdings of a mutual fund. Investors purchase shares in mutual funds. Each share exhibits an investor’s part ownership in the mutual fund and the income it generates. Simply put, the money which gets pooled in by several investors is what makes up a mutual fund.

What is NAV?
After having a fair idea of what a mutual fund is, it’s time to look at the definition of NAV. Net Asset Value (NAV) means the market value of all securities held by one MF scheme. The performance of one MF scheme is denoted by its NAV. NAV per unit is calculated by dividing the market value of the securities of one mutual fund scheme by the total number of units outstanding. To be precise, NAV means a price which you pay for the units of the MF scheme. 

Types of Mutual Funds
Any mutual fund will either be investing the pooled money in equities, debt or a mix of these two. Further, mutual funds can be open-ended or close-ended. Open-ended mutual funds, as the name dictates, means an investor can invest and redeem at any point of time. These mutual funds do not have a fixed maturity period. Close-ended mutual funds, on the other hand, means mutual funds having fixed maturity dates. In these types of mutual funds, an investor can only invest or enter during the initial period. This period is known as the New Fund Offer period. The investment amount will be redeemed automatically on the maturity date. 

Now, we will look at the various types of equity and debt MFs available in India:
Equity or growth schemes: These schemes are one of the most popular MF schemes. These schemes permit investors to take participation in the equity markets. Even though these MFs are categorised as high risk, these schemes have a potential to deliver high returns over the long run. These schemes are for investors who are in their prime earning stage, and who are looking to build a portfolio which gives them superior returns. Normally, an equity fund or diversified equity fund invests pooled money over a range of sectors to distribute its risk. These funds are further divided into three categories: Sector-specific funds, Index funds and Tax savings funds

Money market funds or liquid funds: These funds make investment in the short-term debt instruments. The focus of these funds is to deliver a reasonable return to investors over the short time period. These funds are for the investors having a low-risk appetite and who look at parking their surplus funds over a short time period. As said by many, investors can prefer these MFs rather than putting money in the savings bank account.

Fixed income or debt mutual funds: These funds make investment in debt – fixed income i.e., fixed coupon-bearing instruments such as government securities, bonds, etc.

Balanced funds: As the name dictates, these are MF schemes which divide investments between equity and debt.

 Hybrid / Monthly Income Plans (MIP): These funds are like balanced funds. However, the proportion of equity assets is lesser against balanced funds.

Gilt funds: These funds make investment only in government securities.