Types of mutual funds – Which every investor should know before investing in mutual funds

Mutual Funds

A lot of people are unaware of these different types of mutual funds even though they invest in it on a regular basis. Every mutual fund investor either he is beginner or regular must know about the categories in which mutual funds are classified in order to generate a good return.

Do you know about the types of mutual funds you are going to invest in?

In this article I will tell you 10 different categories of mutual funds which will be helpful for you to improve your investment portfolio.

A mutual fund is the advance tool of investment which has a large number of investors. These funds are classified into different categories based on the goal of investors.

You must be aware of what are mutual funds. If not the click here to read the basics of mutual funds.

Let’s see the categories of mutual funds.

Types of Mutual Funds

Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.

Mutual funds are categorized on the basis of their objectives, style, and strategy.

Balanced Funds
Sectoral Funds
Mid Cap and Small Cap Funds
Index funds

Balanced Funds :

In a very fast booming market, a fund with 7:30 mat is a balanced one. And in a bearish market, a combination of 50:50 may be considered are an aggressive fund. These funds have low risk and low return capacity in comparison with normal equity funds.

These are the funds that put money in Equity and Debt in some balanced proportion. Balanced does not mean 50:50, it may happen that they put money in the ratio of 70:30 or 60:20 or may be 80:20 … but the ideal ratio would be 50:50. It depends on market conditions.

Sectoral Funds :

These are Funds that invest all its money in companies of a particular sector or a bunch of sectors related to each other. The reason for this is high faith in the sector for growth and return potential because of which these funds are very risky and have high return potential.

For example Reliance Diversified Power Fund.

Mid Cap and Small Cap Funds :

These funds are those funds that invest their money in Midcap Stocks or small Cap stocks … Mid-cap and Small Cap companies are companies categorized by there market capitalization.

Large Cap: greater than $10 billion
Mid Cap: Between $2 and $10 billion
Small-Cap: Less than $2 billion

For eg:

“Sanghvi Movers” gave a return of around 4500% in 5 years from 1992 – 1997. An investment of Rs 1 Lac was worth Rs 45 lacs in just 5 years.

In the same period “Jindal Power and Steel” gave a return of 20000 %. So an investment of Rs 50,000 was worth Rs 1 crore in just 5 years.

Mid-cap and Small Cap stocks are riskier as they are small compared to large Cap stocks because of size and reachability in the market. They also have huge potential for growth so they can give superb returns too.

Index funds :
Index Funds are mutual funds which mirror a particular mutual fund. They put their money in the companies which are part of that index and in the same proportion as per the weightage of the company in that index. For Eg:

Franklin India Index Fund which tracks S&P CNX Nifty Fund will invest in companies in that fund in the same ratio as their weights.
Then the fund will also invest in these companies’ stocks in the same proportion. The NAV’s of these mutual funds increase or decrease in the same way as the index. if the index will grow by 2.4% then NAV will also increase by 2.4 %

More funds in next blog

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