Mutual funds refer to an investment fund that pools money from different investors to
purchase securities such as stocks, bonds, short-term debt etc. Portfolios are thus combined
holdings of the mutual funds, where investors buy shares in the mutual funds.
Hence, each share reflects an investor’s part or ownership in the fund and concurrently draw
income through it. Mutual funds are also considered safe and profitable for common
investors which may need little to no knowledge to invest in the securities market.
The market of the mutual funds is a long and a complex one, but in this article we’ve
assembled things in an easy way, so you get a better understanding of the investment
process and ultimately invest in the right stocks.
There are mainly four types of mutual fund categories further divided into sub categories,
but this article talks about the main types of mutual funds one should be acquainted with.
Read below to know more.
Stock funds
Stock funds invest principally in equity or stocks also known as equity securities. Investment
is mainly chosen based on the size or capitalisation of a company viz. small, mid or large cap.
Various sub categories fall in this types of mutual fund, based on the investment approach
there are investment factors like aggressive growth, income-oriented, value etc. Such a
mutual fund would thus integrate its strategy between investment style and company size.
Money market funds
This type of funds are usually safe to invest in and are risk-free, short term instrument’s.
These funds work by creating little to no substantial earning returns and are mainly
government treasury bills.
These funds are thus associated with high quality, short-term debts securities and the
dividends are usually paid reflecting short-term investment rates.
Bond funds
A bond fund is a type of mutual fund that generates a minimum return and is a part of the
fixed income category. It focuses on the investments that pay a regular rate of return, are
actively managed and strive to buy relatively undervalued bonds to sell
them at a profitable price.
Government bonds, corporate bonds, debt instruments etc. fall into this category and the
interest income is generated through the fund portfolio which is then passed on to the
shareholders.
Index funds
The next category for mutual funds is an index fund. Index funds deal with stock investment
that corresponds to a major market index. These funds are associated with less risk and
needs little to no knowledge about the stock market in order to generate profit and is one of the best fund for sip.
Hence are less expenses passed on to the shareholders and are carefully designed with
keeping in the mind cost of investment.
Growth funds
Growth funds aim to invest in stocks that are associated with promising returns and are only
pursued in order to achieve capital appreciation. Not only do these kind of funds have high
returns but concurrently come with a factor of high risk involvement. Growth stock
investment involves precision of work to be done, thus, these stocks are mostly identified by
expert money and managers and people acquainted with the stock market.
