Watching “ Pursuit of Happyness “ on Father’s Day is bound to bring all the memories of all the sacrifices that your father made in order to ensure best future for you. But to me in addition to that , it has a very strong but somewhat hidden lesson - One need to challenge his comfort zone/s in life to achieve his full potential. Beyond all the arguments cited by a large section of people against Mutual Fund, deep down is inertia, inertia not to explore something beyond their comfort or lets say awareness zone.
So lets make a beginning and try to understand what Mutual Funds means and their types.
A Mutual Fund in the crudest form has chiefly three components -
- Retail Investor - Like me and you , who contribute money into a common corpus.
- Mutual Fund Company - Is responsible for proper management and upkeep of the corpus. Hires a fund manager and is responsible for the operational , marketing , legal and other issues pertaining to the fund.
- Fund Manager - who invests money on “behalf of the Retail Investors” as per the objective and strategy of the fund.
Mutual Funds at the most basic level are of two types, based on the kind of assets that they invest in -
- Equity Mutual Fund
- Debt Mutual Fund. Click Here to learn about them. If you want to learn how Debt Mutual funds minimise your tax outgo, Click Here .
Equity Mutual Funds invests in equity i.e. shares and related instruments. Here is a brief go through the different types of Mutual Funds -
- Large Cap Funds - They typically invests in the companies that occupies the top positions on the stock exchange as per cumulative value of all their shares being traded (known as Market Capitalisation).These companies are also known as Bluechip Companies. Common examples will be - Hindustan Unilever, Larsen & Turbo etc. Being market leaders of their respective domain , they command high value in stock exchange and are also the least volatile in their valuations. Hence Large Cap Mutual Funds are supposed to be the safest category among all Equity Mutual Fund categories.
- Mid Cap Funds - They occupy the middle order in the Market Capitalisation deck. They are more volatile than Large Cap Funds but also have more potential of growth.
- Small Cap Funds - They invest in the novice companies who have got low market share or low market penetration or who operate in a product or service category which have very low market potential. Being very small in revenue and profits , they have a high potential for growth in their valuations. But they also are quite risky as such companies can neither be analysed properly nor have strong promoters.
- Diversified / Multi Cap Fund - They invest across companies irrespective of their Market Capitalisation. The idea is to provide “Diversification” and hence minimise volatility with a higher return than Large Cap Funds.
- Sector/Thematic Fund - They invest in companies of a particular sector and hence are highly correlated with the performance of that sector.
- Tax Saving Fund - They are alternate of traditional Tax Saving instruments like PPF, NSC etc. having lock in period of three years. Click Here to learn how they minimise your tax obligations.
- Equity Oriented Hybrid Funds - They have major part but not all of the investments into equity. They also invest in asset class like Debt etc.
So now that you have learnt quite a bit about Equity Mutual funds, why don't you go out and put some money into them. Because doing is the best tool of learning.
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