Introduction to Mutual Funds


What a lot of people don’t realize, is that there’s a lot more to mutual funds than the fact that they’re subject to market risk, and offer documents should be read carefully before investing.

While people who have a lot of money to invest can afford professional “money-managers” and diversified portfolios, mutual funds give the common man access to such professional money managing services. Think of it as a common fund or pool of money, where the public contributes and the collective amount is then invested by experts, according to the investment objective of the fund.

The different types of mutual funds are:

Equity funds - funds that invest in stocks 

Debt funds - funds that invest in fixed income instruments

Money market funds - funds that invest in short-term money market instruments

Hybrid funds - funds that divide investments between equity and debt to create a balanced or diversified portfolio.

In this post, we’re going to take a closer look at Equity funds, in particular, as well as some variations of them. Equity Funds invest in stocks of companies and may further be classified in terms of the market capitalization of the target investment objectives.

These are:

Large-cap funds: These are open-ended equity funds that invest at least 80% of their assets in large-cap (1-100)stocks meaning big, established companies with excellent track record. These stocks are dependable and risk is comparatively less than mid-cap and small-cap.

Mid-cap funds: These are open-ended equity funds that invest around 65% of their assets in equity and equity-related instruments of mid-cap companies(101-250) or companies that are growing and progressing well but still no big enough to be classified as large-cap. The fact that many of these companies may soon progress to large-cap makes this segment quite lucrative for investors.

Small-cap funds: These are open-ended equity funds that invest around 65% of their assets in small-cap stocks(more than 251st) whic refers smaller companies. While these funds generally have an immense potential for growth, with a higher level of risk, of course. These funds are generally for investors with a high risk profile or to balance out a portfolio.

Microcap funds: These are open-ended equity funds which invest around 65% of ther assets in publicly-traded companies that have a market capitalization less than small-cap companies. Like small-cap stock, micro-cap carries an even higher risk with explosive growth prospects.

All equity Funds can be classified into Active and Passive, where the fund is run by a team of experts and a passive fund mirrors a popular market index like Sensex, BSE. 

The main advantage of investing in a mutual fund is that each investor, no matter how small the investment, gets access to professional money management service. Additionally, it would be quite difficult for an individual investor to build a portfolio that’s as diversified and spread out as a mutual fund on their own.

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