Mutual Funds are the most balanced and popular investment option available to retail clients the world over today. The immense popularity of mutual funds as an investment choice is not without reason. Mutual funds enjoy certain inherent and distinct merits over other forms of investment which this article attempts to encapsulate.
Mutual funds are popular because of the following distinctive features which lend them an edge over other forms of retail investment options;
1. MFs offer a wide choice of products based on different forms of categorization, discussed later in the article.
2. MFs are well regulated by financial authorities.MFs are professionally managed by Fund managers.
3.MFs offer a diversification of portfolio and thus spread risk of investment into a thinner layer.
4.MFs offer a fair potential of return combined with the incentive of tax savings.
5.MFs offer liquidity and flexibility of investment.MFs can be availed of at a low cost of initial investment.
6. MFs offer transparency and are easy to track and manage on-line.
No one investment category can offer so many different products to choose from to the discerning customer than a Mutual Fund;
A. Classified on the basis of their Risk factor, one can choose from;
Equity Funds are pegged to the Equity markets or shares and are thus considered more risky with a high return potential.
Debt Funds which are based on the Debt instruments like Bonds and debentures and are considered low-risk, low-return funds.
Balanced funds which comprise a healthy mix of both Equity and Debt.
Money Market Funds which allows high amounts of money to be invested for very short periods of time.
B. Classified on the basis of Objective of investment, one can choose from;
Tax-saving Funds or ELSS (Equity Linked Saving schemes) which offer the investor tax savings on income over and above the return.
SIPs (Systematic Investment Plans) which allow a regular investment of small but fixed amount invested every month for a certain lock in period maybe 2 years.
SWPs (Systematic Withdrawal Plans) which allows the investor to regularly withdraw a sum for a certain period.
Growth Funds- which show a higher return but at redemption.
Income Funds- which allow the investor a regular income in the form of dividend payout but not a very high value on redemption.
C. Classified on the basis of the industry/Sector they represent one can choose from Technology funds, Banking funds, Pharma funds, Construction, Media funds etc.
D. Classified on the basis of the Market Capitalization of stocks and hence the Risk-Return factor, Funds can be Mid Cap, Large-cap or Small-cap.
E. Classified on the basis of Structure- Funds may be Open-ended which allows the investor to exit the fund at any point of time and usually carries an exit load or Close-ended which has a minimum lock-in period till redemption.
Most Mutual Funds will combine 2 or more options from the above categories, for example an Equity Fund which also allows Tax saving to investors and gives the investor the option to choose between Growth scheme or Dividend pay-out schemes.
However, before jumping onto the Mutual Fund bandwagon, it is important to remember that Mutual funds are also collectively representing the stock markets and are thus not risk-free. One must also keep in mind the entry and exit load while planning out an investment. It is highly recommended to read the Fund prospectus as also to consult an Investment advisor in order to make a prudent and profitable decision while investing in Mutual Funds.