Mutual funds are one of the most popular investment options available today. These funds enjoy immense popularity among investors and have given excellent returns over the past years. Investing in these funds has also become very easy with increasing financial education. But before investing in mutual funds it is important to understand what these funds are and their risk orientation.
What is mutual fund?
A mutual fund is a fund that collects or pools resources from multiple investors and invests the funds in a range of different assets. These mutual funds are classified based on the assets that they invest in. Depending on the asset that they invest in, the risk for each mutual fund will change. As an investor, it is important to understand the risk involved in investing in a particular mutual fund and match it to personal risk tolerance and investment objectives.
What is Mutual fund ? Is a common question that arises in everyone’s mind who is looking for an investment option. Mutual funds are professionally managed with each fund having a fund manager. These funds are highly liquid and can be sold at their prevailing market rates in the stock market. This makes it very easy for any investor to get invested in a particular mutual fund and also to exit the fund whenever they require funds.
Types of mutual funds:
- Equity mutual funds
- Debt mutual funds
- Hybrid mutual funds
- Exchange traded funds
Equity funds form an important part of mutual funds. They invest in equity shares which make them highly risky to invest in. With the SEBI reclassification of mutual funds, there is a whole different category for equity based mutual funds or funds which invest in equity but have a separate investment strategy. Let us understand more about these equity based funds.
Equity based mutual funds invest in equity shares of mixed category i.e in a mix of large cap, mid cap and small cap shares. They have a particular strategy and accordingly make their investment picks. These funds can further be categorized into:
- Contra fund:
A contra fund performs exactly opposite to the way the market is heading. If the market is underperforming, it will invest in shares that are currently outperforming and vice versa. This inverse investment strategy helps the fund to get growth regardless of the general direction of the market.
- Value fund:
A value fund invests primarily in equity shares that are currently undervalued by the market in hopes of appreciation in the value in the future.
- Arbitrage fund:
An arbitrage fund invests to capture the price differential in a share in the cash and futures market. It takes a position in the cash market and a simultaneous position for the same share in the futures market.
- Focused fund:
A focused fund invests in a small number of funds at one time. Their portfolio of stocks is small.
- Sectoral/Thematic fund:
A sectoral or thematic fund invests in a particular sector or a particular theme like for example PSU fund, Banking fund, IT fund, Pharma fund. It also invests in a particular theme like funds that focus on one aspect of the economy in particular.