mutual funds introductory notes

I have been studying a little about share markets and mutual funds investment and in near future I plan to invest some extra cash so just for records I wanted to make some notes about the topic.

Investing in Stock Market involves high risk but it does lead to high returns. Basically, in order to ensure you don’t lose your money you need to conduct good research on the company you wish to invest in. Therefore, the investor has the ability to choose exactly which stock(s) he/she is going to purchase.

But the area in which I’m mainly interested is Mutual Funds because it is less risky and I don’t want to lose the little money I have. The main component involved in mutual funds are the Asset Management Company or AMCs that invest our money in various stocks, bonds, sectors, etc. based on the advice and opinion of the fund manager/expert panel of the AMC. The AMCs earn money by taking a cut (which is mentioned beforehand) from the total profits received through the investment. Different mutual funds have variety in the rate of returns like from 4-30% and they have variety in risk too. The area in which the AMC shall invest the money depends upon the type of the mutual fund.

Note: The return rates listed are always “expected” but not “guaranteed”.

The main types of mutual funds are:

• Equity mutual funds - investments by AMCs are done on share market. Hence the risk and more reward. This category is again divided into five types.
  • Large/Small/Mid Cap equity funds - Some large cap equity have very high investment amount which results in low expected returns. For more details on how risk and return vary for different caps, see graphic.
  • Diversified or Multi-cap equity funds - the investment is done on stocks of companies that vary in cap sizes.
  • Equity Linked Saving Scheme - mainly for saving money on taxes
  • Sector mutual fund - investment is done by the AMC on one sector only for instance, agriculture. Good investment if one sector is booming in particular.
  • Index Funds - this type of equity mutual fund is passively managed funds and the return is completely dependent on sensex/nifty.
• Debt mutual funds - investment on government bonds, certificates, etc. [write about bonds]. Its types are:
  • liquid funds - very low risk and low but stable return rate
  • gilt funds - investment only in government bonds, very safe.
  • fixed maturity plan - alternative to FD
• Hybrid mutual funds - it is a mix of debt + equity funds. Based of the ratio of debt fund and equity fund investment. It is divided into two types:
  • Balanced Savings Fund (Equity savings) - 70% in debt and 30% in equity.
  • Balanced Advantage Fund (Hybrid aggressive) - 30% in debt and 70% in equity.

In conclusion, mutual funds end up being a safer option because the investments undergo diversification i.e. the money is invested in various stocks (in accordance to expert opinion) so even if some of the stocks result in loss, it is possible to obtain the profit i.e. the return from the rest of the stocks. Also, through mutual funds it is possible to invest in stocks with very little savings because the AMCs make investments using the total amount collected and not through the investment by one individual.