Various Types of Mutual Funds and Importance of Selecting
Once upon a time there was a trader, who use to carry goods on his horse for long distances…But last few days, the road he was travelling on had gone bit treacherous, due to incessant rains…
Thus he had to walk along the horse and this was taking lot of his energy and time, On the top of it he would see people laughing at him all this way along. His dilemma was should he abandon his trusted horse and look for some bullock cart? Though the bullock cart would be able to carry more goods, but the time taken to reach his destinations would be more then 2-3 times then the horse.
Just like the current Equity investors, he was stuck with the thought…should be bear the current pain and temporary slow pace or dump the equities and buy safer and steadier assets?
The answer too lies in the story; The choice of the right vehicle be it for carrying goods or reaching your goals is determined by your objective or needs and you need to choose the right mix of assets or right mix of vehicles
A Classic Medium of the Modern Era
Mutual Funds are one of the modern day vehicles for investors & it is pertinent to know that mutual funds offer wide variety of asset classes to choose from for eg Debt; Equity domestic Indian and Global; Gold and now few Real Estate REIT funds would be soon available.
Each category of Mutual Funds have different purpose and further there are many sub categories in each of the category; where investors can choose the proper category based on their requirements and period of investment.
Debt funds are suitable for investors who do not prefer volatility; but need a steady income as these funds invest in GOI securities; Corporate Bonds & Treasury Bills issued by RBI. These funds would usually replicate the fixed deposit rate of return; but if an investor invests for more than 3 years, these debt funds become tax efficient. If an investor has invested for more than 3 years in Debt Fund his tax liability is 20% Post indexation – which is a good saving for investors with high tax brackets. The other good part of debt funds is the investment is spread in 50-70 different instruments; so the diversification can reduce the impact on investment in case of default by one/2 institution.
One other interesting fund within debt is G.Sec funds – which solely investment of GOI Sovereign of various maturities – these funds offer extreme safety but are bit volatile as their NAV moves in opposite direction of interest rate cycles meaning if interest rates move up, as they are doing now their NAVs will go down & vice a versa ; but when interest rates move down, the NAVs of these funds move up. Smart investors are nowadays investing these funds with fixed maturities of 5/7/10 years.
Similarly there are various fund options in Equity funds too broadly varying from Large Cap; Flexicap; Multicap; Midcap & Small Cap funds; Value, Sector and thematic funds. Basically Top 100 Stocks on the basis of market capitalization of NSE/BSE are classified as Large Caps; 101-250 are classified as Midcap and 251 to 500 are classified as Small cap funds. Thematic funds invest in theme based stocks life Infrastructure; Consumption; Logistic & Transport & Sector funds invest in stocks from particular sector like Banking; Energy or Technology funds.
Global & Thematic Funds
Global Funds are usually feeder funds meaning the Indian mutual funds invest in one of the running global mutual fund scheme or ETF to that they can leverage their expertise. Global funds invest in stocks across the globe or specific to a country or a region like USA, China, Asian Emerging markets.
Choosing the right medium is Important
India’s first Mutual Fund was launced in way back in 1964 – the US 64 by Unit Trust of India and the Mutual fund industry has grown by leaps and bounds since then and is offering a bouquet of various funds now. Investors need to choose and invest in funds suitable to them based on their knowledge, time horizon and risk appetite.
The choice of the right vehicle be it for carrying goods or reaching your goals is determined by your objective or needs and you need to choose the right mix of assets or right mix of vehicles as advised by your trusted investment advisor or financial planner.
Mutual Fund Distributor
Rajendra Bhatia
rb@aarthashastra.com