Types of mutual funds are based on investment objectives are
1. Growth or equity fund: These are funds that predominantly invested in equity and equity related schemes. Although these schemes have risk associated with the equity market, they also have a high growth potential while also having a high risk Investors must understand that these types of scheme must be entered keeping the long time period say for more than two years.
2. Sector specific funds: The investment objective of these funds is to invest in securities of a specific sector. The choice of the sector could vary depending on the investor preference and the return risk attributes of the sector. Sectoral funds are not well diversified as simple equity funds.
3. Equity linked saving scheme: This is a diversified equity scheme, which gives an investors benefit from tax point of view. On investing in this scheme, the investor gets return from taxable income to the extent of amount invested. This deduction is subjected to a maximum of Rs 1,00,000 .The investment is subjected to a lock in period 3 years.
4. Index fund: This is an approach based on passive style of fund mamangement. The fund manager does not take a call on individual stocks; the focus is on creating a portfolio that replicates an existing market index. An index fund provides an ideal exposure to equity market, without the investor having to bear the risk and cost arising from the market view that fund manager may take.
5. Income fund: This type of scheme invests in debt securities and government bonds. The risk is low and so the return,
6. Monthly income fund: As the name goes, these schemes have options for investors to choose monthly dividends. These schemes generally invest a small portion in equity and major portion in debt fund.
7. Fixed maturity plan: Fixed maturity plan (FMP) have a fixed maturity date. It could be a month, a quarter, or a year. Some have 3-4 year tenure. It is similar to a debt fund, but since the fund manager knows the tenure of scheme, it is easier to invest.
Advantages of Mutual Funds:
1. Diversification: since, a mutual fund scheme invest in a number of stocks, it helps the investors reduce his risk, as all his money is not in a single basket. Even if the stock price of one of the companies goes down, it does not result in a substantial loss to the investor as the other holdings can compensate for the loss.
2. Professional management: Fund managers in mutual fund are professionals who track the market on the regular and continue basis. With their mix of professional qualification and market knowledge, they are better equipped to understand the market and the normal investor.
3. Liquidity: Investment in mutual funds is completely liquid and can be redeemed at NAV related price at any working day.
4. Flexibility: Mutual funds offer a lot of flexibility to the investors in terms of the ability to switch smoothly between scheme of the same fund family, switching between dividend and growth options, systematic investment and withdrawal plans.
5. Choice of funds: A wide choice of fund schemes is available to the investors across the asset classes (equity/debt) industries, indices, and open ended/close ended schemes.
6. Transparency: An investor gets up-to –date information on the scheme, value of his investment, the various cost and charges and the number of units he has all detail.
7. Relatively inexpensive: With compared to other direct investment in capital markets, mutual costs less as they save the brokerage charge, demat, and depository costs.
8. Convenient administration: The process of investing, redeeming or switching is simple in mutual funds. Moreover the fund manager as actively managing the portfolio, the investor is not required to take the buy/sell decision to track daily movements.
9.Tax benefits: Investors in the mutual fund also enjoy the tax benefit, such as tax free dividends (subject to distribution tax) and concessional rates on short term and long tem capital gains.
10. Well regulated: Mutual fund industry is one of the highly regulated industry in terms of adherence to prescribed norms for valuation, disclosure to the investors and transaction processing.
Some common transaction in MFs are-
1. Investment Investing in a scheme.
2. Redemption Withdrawal of money from the scheme
3. Switch moving from one scheme of the fund house to another scheme of the same fund house. You need to redeem the money and reinvest again.
4. Systematic investment plan (SIP) Investment of the specified amount is done on a particular day of every month, irrespective of the market condition. Instructions for the number of months for the SIP have to be given in advance.
5. Systematic transfer plan (STP) Systematic transfer plan is a combination of switch and SIP. We can instruct a particular amount to be switched from one scheme to other on a particular day of every month.
6. Systematic withdrawal plan (SWP) Systematic withdrawal plan is helpful when one has lump sum to be invested and requires periodic payment. You could specify the date when you require the money at a particular amount is automatically redeemed every month from the scheme mentioned by you for the specified period.