The past few months have been difficult for investors who reposed complete faith in the stock markets. Millions of rupees of investors in the stock markets were wiped away as the index plunged. Global crisis, the foreign institutional investors' (FII) large-scale withdrawals and the economic slowdown affected the market performance adversely. Investors in mutual funds weren't spared either. It was a horrible fall for equity funds where as much as half of their worth was eroded.
Mutual funds were considered a safe and solid investment that yielded good returns over the past few years. But this time the gains over the last two years were almost completely washed away. High interest rates and slowing economy left a huge dent behind. But some investors believe it is the right time to fish in the stock markets for value picks. For other investors who do not want to shun the markets altogether, yet play it safe, mutual funds are the only alternative.
Mutual funds can be classified on the basis of risk and investment tenure:
A) Equity funds
Here, fund managers make major investments in the stock markets. Investors can either select a dividend reinvestment option or growth option where money is reinvested. The aim is to provide capital appreciation and reap good returns by taking high risks. The fund manager may lock your money across a wide array of companies from big bluechip ones to new start-ups. Owing to this, equity funds are volatile in nature.
RISK: HIGH Investment horizon: Long term - five years or more
B) Debt funds
Debt funds invest in securities like bonds, corporate debentures, government securities (gilts) and money market instruments. Unlike growth funds that provide capital appreciation, the aim of debt funds is to provide regular income. Income funds aim to make regular payouts to the investors. Investments in government securities is considered the safest. If interest rates fall, the NAV is most probably set to increase. If rates go up, NAV is set to fall.
Risk: Medium to low. Sometimes when returns are low, inflation could erode the returns. Investment horizon: Not long in an inflationary economy.
C) Money market funds
In case of money market funds, the fund manager invests in instruments like treasury bills, certificates of deposit and commercial paper. The returns are much higher than ordinary bank accounts. Liquid funds are one of the safest and are highly liquid.
RISK: LOW Investment horizon: Short
D) Balanced funds
Here, investments are made in a balanced mix of debt instruments, convertible securities and equity. Fund managers try to reduce risk of capital erosion and provide regular income. Investors can expect capital appreciation as a large chunk of money is put in equity markets.
Risk: Medium Investment horizon: Long
E) Sector funds
Investments are made in stocks of companies belonging to a particular sector like infrastructure, automobile, or FMCG. Since there is not enough diversification and money is invested in a particular sector, it may carry high risks. Returns may be very high if the sector performs well. If the entire sector collapses or slows down, the investor could lose his money.
RISK: HIGH Investment horizon: Long
F) Index funds
These funds aim to mimic the performance of a particular index like BSE or Nifty. Securities that form a part of the portfolio are in the same proportion as the composition of that index. NAVs of such schemes rise or fall with the rise or fall in the index.
RISK: HIGH Investment horizon: Long
Mutual funds were considered a safe and solid investment that yielded good returns over the past few years. But this time the gains over the last two years were almost completely washed away. High interest rates and slowing economy left a huge dent behind. But some investors believe it is the right time to fish in the stock markets for value picks. For other investors who do not want to shun the markets altogether, yet play it safe, mutual funds are the only alternative.
Mutual funds can be classified on the basis of risk and investment tenure:
A) Equity funds
Here, fund managers make major investments in the stock markets. Investors can either select a dividend reinvestment option or growth option where money is reinvested. The aim is to provide capital appreciation and reap good returns by taking high risks. The fund manager may lock your money across a wide array of companies from big bluechip ones to new start-ups. Owing to this, equity funds are volatile in nature.
RISK: HIGH Investment horizon: Long term - five years or more
B) Debt funds
Debt funds invest in securities like bonds, corporate debentures, government securities (gilts) and money market instruments. Unlike growth funds that provide capital appreciation, the aim of debt funds is to provide regular income. Income funds aim to make regular payouts to the investors. Investments in government securities is considered the safest. If interest rates fall, the NAV is most probably set to increase. If rates go up, NAV is set to fall.
Risk: Medium to low. Sometimes when returns are low, inflation could erode the returns. Investment horizon: Not long in an inflationary economy.
C) Money market funds
In case of money market funds, the fund manager invests in instruments like treasury bills, certificates of deposit and commercial paper. The returns are much higher than ordinary bank accounts. Liquid funds are one of the safest and are highly liquid.
RISK: LOW Investment horizon: Short
D) Balanced funds
Here, investments are made in a balanced mix of debt instruments, convertible securities and equity. Fund managers try to reduce risk of capital erosion and provide regular income. Investors can expect capital appreciation as a large chunk of money is put in equity markets.
Risk: Medium Investment horizon: Long
E) Sector funds
Investments are made in stocks of companies belonging to a particular sector like infrastructure, automobile, or FMCG. Since there is not enough diversification and money is invested in a particular sector, it may carry high risks. Returns may be very high if the sector performs well. If the entire sector collapses or slows down, the investor could lose his money.
RISK: HIGH Investment horizon: Long
F) Index funds
These funds aim to mimic the performance of a particular index like BSE or Nifty. Securities that form a part of the portfolio are in the same proportion as the composition of that index. NAVs of such schemes rise or fall with the rise or fall in the index.
RISK: HIGH Investment horizon: Long
