A mutual fund is a trust under which money is collected from a large number of investors through the sale of units of investment. This pool of money is invested in securities such as stocks, bonds, and other money market instruments. Mutual funds in India are governed by Securities Exchange Board of India (Mutual fund) Regulation 1996 with exception of UTI (Unit trust of India) as it was created by UTI act passed by the parliament.
There are seven common types of mutual funds.
- Money Market funds: – These funds invest in short term fixed income securities such as government bonds, treasury bills, bank receipts, commercial papers and certificates of deposit. They are safer types of investments but with a lower rate of return than other mutual funds.
- Fixed Income Funds: – These funds buy an instrument which pays a fixed rate of return like government bonds and high yield corporate bonds. They focus on income on a regular basis as interest. High yields bonds are generally riskier than government bonds.
- Equity Bonds: – These funds invest in stocks. They are aimed to grow faster than money market or fixed income funds. They usually carry a higher risk. You can choose from different types of equity funds including those that focus on growth stocks which usually do not pay a dividend, income funds which hold stock that pays a large dividend, value stocks, large-cap stocks, mid-cap stocks, small-cap stocks or combination of these.
- Balanced funds: – These funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a strategy to distribute the money among the different types of investment. They tend to have more risk than fixed income fund, but less risk than pure equity funds. Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities and more bonds.
- Index funds: – These funds are based on the movement of a specific index such as S & P (standard & poor) index or TSX index. The value of the fund moves up and down according to the movement of the index. Index funds generally a lower cost than actively managed fund because the portfolio manager does not have to do much research or make any investment decision.
- Specialty Bonds: – These fund focus on specialized mandates such as real estate, commodities or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights and diversity. It may also avoid companies involved in alcohol, tobacco, gambling, weapons or military.
- Funds of Funds: – These funds in other funds. Similar to balanced funds, they try to make asset allocation and diversification easier for an investor. The rate of return of funds of fund tends to be higher than stand-alone mutual funds.