Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time.
One of the options is to invest the money in stock market. But a common
investor is not informed and competent enough to understand the
intricacies of stock market. This is where mutual funds come to the
A mutual fund is a group of investors operating through a fund manager
to purchase a diverse portfolio of stocks or bonds. Mutual funds are
highly cost efficient and very easy to invest in. By pooling money
together in a mutual fund, investors can purchase stocks or bonds with
much lower trading costs than if they tried to do it on their own. Also,
one doesn't have to figure out which stocks or bonds to buy. But the
biggest advantage of mutual funds is diversification.
Diversification means spreading out money across many different types
of investments. When one investment is down another might be up.
Diversification of investment holdings reduces the risk tremendously.
On the basis of their structure and objective, mutual funds can be
classified into following major types:
A closed-end mutual fund has a set number of shares issued to the public
through an initial public offering.
Open end funds are operated by a mutual fund house which raises money
from shareholders and invests in a group of assets
Large cap funds
Large cap funds are those mutual funds, which seek capital appreciation
by investing primarily in stocks of large blue chip companies
Mid cap funds are those mutual funds, which invest in small / medium
sized companies. As there is no standard definition classifying
Equity mutual funds are also known as stock mutual funds. Equity mutual
funds invest pooled amounts of money in the stocks of public companies.
Balanced fund is also known as hybrid fund. It is a type of mutual fund
that buys a combination of common stock, preferred stock, bonds, and
Growth funds are those mutual funds that aim to achieve capital
appreciation by investing in growth stocks.
No load funds
Mutual funds can be classified into two types - Load mutual funds and
No-Load mutual funds.
Exchange traded funds
Exchange Traded Funds (ETFs) represent a basket of securities that is
traded on an exchange, similar to a stock. Hence, unlike conventional
Value funds are those mutual funds that tend to focus on safety rather
than growth, and often choose investments providing dividends as well as
Money market funds
A money market fund is a mutual fund that invests solely in money market
instruments. Money market instruments are forms of debt that mature in
less than one year and are very liquid.
International mutual funds
International mutual funds are those funds that invest in non-domestic
securities markets throughout the world.
Regional mutual funds
Regional mutual fund is a mutual fund that confines itself to
investments in securities from a specified geographical area, usually,
the fund's local region.
Sector mutual funds are those mutual funds that restrict their
investments to a particular segment or sector of the economy.
An index fund is a a mutual fund or exchange-traded fund) that aims to
replicate the movements of an index of a specific financial market.
Fund of funds
A fund of funds (FoF) is an investment fund that holds a portfolio of
other investment funds rather than investing directly in shares, bonds
or other securities.