Tuesday, May 13, 2008

Types of Mutual Funds .

Mutual Funds in India
UTI was the first mutual fund in India which started in 1963 and from 1987 onwards some PSU banks like SBI, PNB, Bank of India, Canara Bank and Bank of Baroda started their own mutual funds. Some financial Institutions like LIC and GIC also joined the list. With the advent of this the Assets under management increased dramatically. A new phase started in the history of Mutual funds when in 1993 Private Sector institutions were allowed to set up mutual funds in India. Kothari Pioneer was the first Private sector mutual fund. Thereafter Private sector Banks started their Mutual Funds joining with the experience of some foreign partners. ICICI Bank partnered with Prudential to launch ICICI Prudential mutual fund and then many others joined the list.
Types of Mutual Funds
Following types of mutual fund are currently prevalent in India.

Equity Funds
Equity funds are Mutual fund schemes which invest money in equity shares only. A pure equity fund can give you very high returns, but it carries maximum risk. Investors with very high risk appetite would invest in these types of schemes.

Sector Funds
Sector funds are Mutual fund schemes which invest in a particular sector such as IT Sector, Pharma Sector, Media and Entertainment, Banking, Infrastructure, etc. An investment can be made in a sector fund if the investor holds a view that a particular sector is performing very well or is expected to perform well in the near future. For example if an investor is very bullish on infrastructure sector in India, he may choose an Infrastructure fund to get maximum return on his investment.
A sector fund may be Small Cap fund, a Mid Cap fund or a Blue Chip fund investing in Small cap shares, Mid Cap shares and Blue chips respectively.

Debt Funds
Debt Funds are Mutual Fund Schemes which invest purely in Debt instruments which bear fixed rate of interest. In these types of schemes the risk is very low and the return is also low depending upon the prevalent rates of debt instruments. These are ideal for investors who do not want to take any risk on their investments.

Income Funds
These types of mutual fund schemes invest in such instruments so as to generate a fixed income.

Liquid Funds
In these types of schemes the money is invested in liquid instruments which can be redeemed any time. These types of schemes are suitable for investments of very short duration. Companies having excess cash for a short period of time generally keep it in liquid funds.

Hybrid or Balanced fund
These types of funds try to strike a balance between risk and return. A portion of money is invested in equity shares and rest of the fund is invested in debt instruments. The hybrid may be 80% in equity and 20% in debt or any other combination that the Fund manager may deem prudent depending upon the risk to be taken in the portfolio. If an investor wants to take a limited risk, he can choose from these funds with equity mix of his risk appetite.

Index Funds
These schemes invest in index stocks. These funds would give similar returns as the index would give. If an investor is generally bullish on market and is expecting the index to go up, he may invest in an index fund.

ELSS (Equity linked savings scheme)
These schemes are generally devised to give tax benefits to the investors. These schemes generally have a lock in period of at least 3 years. Which means the units once purchased under these schemes, to obtain tax deductions under section 80C of the Income Tax Act of India, can not be redeemed for at least 3 years. A deduction of up to a maximum cap of Rs. 1,00,000/- is allowed under the above mentioned section 80C as per the current provisions of Income Tax Act.

Arbitrage Fund
Under this scheme the fund manager benefits from the difference of rates quoting in different exchanges or the difference in rates of a stock in cash and futures market. Here the returns are less, but the chances of negative portfolio are very rare. A slow and steady growth is expected.

Open-ended and Close-ended
These funds may be open ended or close ended. An open ended fund remains open for purchase or sale of units after the close of New Fund Offer scheme whereas in a close ended scheme the units cannot be purchased after close of New Fund Offer, however in some schemes the units can be sold with an exit load at any time after the close of scheme.

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