SIPs, Mutual Funds are the Buzz words. What investment options suits your GOALS is the KEY to your decisions.
The financial industry is ever evolving with new products & schemes. This makes trainers like me more responsible in educating retail investors & individual financial advisors (IFAs) which helps in right selection of products & advising right products respectively.
What if your wealth, if not compounded, over several years of investing?
Only 10% of retail investors consider mutual fund schemes as an investment option. Mutual fund is still considered to be a highly-risky investment proposition.
Understanding details of mutual fund & it’s types tells you how mutual fund schemes are flexible, easy investment methodology is available & how every investor’s needs can be accommodated.
Types of Mutual funds are as follows:
1) Open-ended mutual funds: Investors are allowed to buy or sell units at any point of time. There is no maturity date in this case. Further classification of these funds are as follows:
a) Debt/Income scheme – Funds in this option are channelized in debentures, government securities, debt instruments. People who want to invest in low risk mutual fund schemes. This is a good option with steady income.
b) Money Market/Liquid Fund – Investors who are looking for short term utilization of funds should go for these schemes. Here the funds are invested in short-term debt instruments & provide reasonable incomes.
c) Equity Growth Schemes – Most popular scheme amongst investors and can be availed for both short-term & long-term investment options. Though investing short-term can be a risky proposition. This schemes, if availed for long-term, can generate higher capital returns. Equity schemes are advisable for long-term gains. These funds are further grouped under 3 categories:
- Index Scheme – In this case movements of NIFTY, Sensex, etc., are replicated by investments.
- Sectoral Scheme – These schemes are governed by the proposition of higher risk and higher returns. The funds here are classified on sectors, industries & segments: mid caps & small caps sectors
- Tax Scheme – Usually these schemes have 3 years lock-in period. As the name suggest they benefit the investors to save taxes. Usually recommended for medium & long-term investments options and they do give good returns.
d) Balanced Schemes – These schemes are both growth & income oriented. Investors enjoy incomes at regular intervals from these schemes. Equities & fixed incomes both options are pre-determined in these schemes in proportions given in the scheme offer document.
2) Closed ended mutual funds: These funds allow investors to invest only during launch i.e. NFO (New Fund Offer). These funds have a given maturity period. Further categories under closed ended funds are as follows:
a) Capital Protection Schemes – In this option the principal amount of the investor is safeguarded. Funds are invested in high-quality secured options. Very less exposure is given to equity options. Reasonable returns are delivered upon maturity.
b) Fixed Maturity Schemes – As the name suggest, these schemes have a fixed maturity period. These are passively managed debt schemes and no trading happens for these debt instruments. An interest is earned upon maturity.
3) Interval Mutual Funds – These are combination of open & closed ended mutual funds. Investors trade units of these fund at pre-defined intervals.
Maturity period of each scheme, expected returns i.e. goals, investment period involved, risk taking ability & age of investor predominantly governs one’s choice of investment schemes. The investors appetite governs proper financial & investment plan & an expert’s advised is needed.
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