Investing money in mutual funds is becoming trendy these days. But with so many funds available in the market, it becomes a tedious job for the investors, especially the new ones, to choose which type of mutual fund is right for them.
So, here in this article, we have provided a list of various mutual funds so that the investors can choose the most suited fund for them.
TYPES OF MUTUAL FUNDS
1. LIQUID OR ULTRA SHORT TERM PLANS
The Liquid or Ultra Short term plans are suitable for the investors who have a very short term investment horizon, ranging from 1 to a couple of days. Rather than investment, it’s just parking of the “surplus liquidity” – it’s a superior alternative to a “bank saving account” wherein you will earn higher yield. Though these kinds of funds do not carry interest rate risk, but they have credit risks. The main purpose of the investor should be to earn accrual interest.
2. SHORT TERM PLANS
The short term plans are similar to liquid funds but with a slightly high maturity profile. Therefore, these are best suitable when the investor has an investment horizon between 3 to 12 months. You can place the short term plans in between a bank savings account and a fixed deposit. They possess credit risks as well as some amount of interest rate risk. The objective of the investor should be to make accrual interest along with some capital gains.
3. INCOME OR GIFT FUNDS
The income or gift funds primarily invest in longer duration corporate papers with some Government of India Securities (G-Secs) while Gilt Funds invest only in G-Secs. These kinds of funds are suitable for medium to long term investment. Both the interest rates and bond prices have negative relation. This means that the bond prices go up when interest rates come down and vice versa. Therefore, timing is a crucial part of this program. The objective of the investor should be to make accrual interest as well as capital gains.
4. FIXED MATURITY PLAN
A Fixed Maturity Plan or FMP is ideal for a fixed period of time & therefore locks in at the prevailing interest rate for that period of time and therefore does not have any interest rate risk. But the Fixed Maturity Plan possesses a very high opportunity loss risk. This means if you lock in long-term FMP just before the beginning of an interest rate hike cycle then you will lose the opportunity of earning higher yields. Hence, the Fixed Maturity Plan or FMP should be done at the peak of the short term policy hike interest rate cycle.
5. BALANCED FUND
As the name clearly indicates, a balanced fund invests the money in both the equities and debt and hence balances your asset allocation needs. The fund is named Balanced but it is the greatest imbalance of all the funds because it takes the credit of protecting and shielding your money of all the major investment robbers which are inflation, income tax, interest rates, market volatility as well as asset allocation. The main objective of the investor should be to get attractive returns during equity bull markets and stabilize its portfolio during equity bear markets.
6. EQUITY FUNDS
The equity funds invest the money mostly in equity shares. Over a longer period of time, the equities do offer higher return then fixed income because equity is growth capital. But timing is really crucial in the markets & you should have the courage of buying during cyclical bottoms and selling during structural tops. There are so many types of schemes such as large cap, mid cap, small cap, sector funds, theme funds etc. Many fresh funds & schemes come up at times of exuberance. The banking funds will be tossed when the banking stocks have performed well, infrastructure funds when the infrastructure stocks are going up or IT funds when the technology boom is underway, so on and forth. These sector funds are just simple and smart tactics to collect money from the gullible investors.
But keep in mind that there is no cause for you or anybody else to believe that they can pick winning stocks or time the markets. Therefore, the best option for any equity investor is to stock into low value passively managed index funds because year after year they would beat at least 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds.
7. GOLD FUNDS
The Gold Funds & the ETFs are now available for the Indian Mutual Fund investor. These funds provide ease & safety of holding Gold in e-format as opposed to the physical format. They also carry tax benefits such as not subjected to “wealth tax” and become long term in 1-year as opposed to 3- years for physical gold. However, the investors need to keep in mind that investment in Gold ETF is as good or bad as the price of the yellow metal itself because the fund holds Gold for you and hence your view on Gold is of utmost importance.
8. INTERNATIONAL FUNDS
These days there are a lot of international funds on offer like the feeder funds i.e. the Indian fund house just acts as a “postman” – collecting funds from Indian investors and putting it in their international funds.
The ETFs on foreign markets are also available in India. But if it’s problematic to predict Indian markets then it would be tougher to predict the foreign markets. Apart from the pure returns from these funds, currency plays a major role – the thumb rue being weaker the Indian rupee against the US Dollar, higher the return to Indian investor.