Mutual Fund

A Mutual Fund is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or other assets. It is managed by a professional fund manager or an investment management company.

Here are some key points to understand about mutual funds:

• Pooling of Funds: Mutual funds pool money from various investors with similar investment objectives and create a large investment fund. Each investor in the mutual fund owns shares or units in proportion to their investment amount.
• Diversification: Mutual funds offer diversification by investing in a variety of securities. This diversification helps spread the risk across different asset classes, sectors, and individual securities. By investing in a mutual fund, investors can gain exposure to a diversified portfolio that may be difficult to achieve individually.
• Professional Management: Mutual funds are managed by professional fund managers who make investment decisions on behalf of the investors. These fund managers have expertise in analyzing the markets, selecting securities, and managing the portfolio. Their goal is to achieve the fund’s investment objectives and generate returns for the investors.
• Investment Objectives: Each mutual fund has a specific investment objective, which defines the purpose and goals of the fund. It can be focused on growth, income, capital preservation, or a combination of these objectives. Investors choose a mutual fund that aligns with their investment goals and risk tolerance.
• Types of Mutual Funds: Mutual funds come in various types, such as equity funds, bond funds, money market funds, sector-specific funds, index funds, and more. Each type of fund has its own investment strategy, asset allocation, and risk profile.
• Liquidity: Mutual funds offer liquidity to investors, allowing them to buy or sell units/shares on any business day at the net asset value (NAV). This provides flexibility for investors to enter or exit their investments as per their financial needs.
• Transparency: Mutual funds are regulated and required to provide regular disclosure of their holdings, performance, expenses, and other important information. Investors can access this information through the fund’s prospectus, annual reports, and other documents. It enables investors to make informed decisions and monitor their investments.
• Costs and Fees: Mutual funds charge fees and expenses for managing the fund, i
• ncluding management fees, administrative fees, and operating expenses. These costs are reflected in the fund’s expense ratio, which represents the percentage of assets deducted annually to cover expenses.

Types Of Mutual Funds

There are several types of mutual funds available to investors, each with its own investment objective, asset allocation, and risk profile. Here are some common types of mutual funds:

• Equity Funds: Equity funds, also known as stock funds, invest primarily in stocks or equity-related securities. They aim to provide capital appreciation by investing in companies across different sectors and market capitalizations. Equity funds can be further classified based on their investment focus, such as large-cap, mid-cap, small-cap, sector-specific, or global/international funds.

Equity Funds are categorized into the following types:

1. 1. Multi-Cap Fund: An open-ended equity scheme that invests a minimum of 65% of its assets across large-cap, mid-cap, and small-cap stocks.
   2. Large Cap Fund: An open-ended equity scheme that predominantly invests a minimum of 80% of its assets in large-cap stocks.
   3. Large & Mid-Cap Fund: An open-ended equity scheme that invests 35% of its assets each in both large-cap and mid-cap stocks.
   4. Mid-Cap Fund: An open-ended equity scheme that predominantly invests 65% of its assets in mid-cap stocks.
   5. Small-Cap Fund: An open-ended equity scheme that predominantly invests a minimum of 65% of its assets in small-cap stocks.
   6. Dividend Yield Fund: An open-ended equity scheme that predominantly invests a minimum of 65% of its assets in dividend-yielding stocks.
   7. Value Fund: An open-ended equity scheme that follows a value investment strategy. It has a minimum investment of 65% of total assets in equity and equity-related instruments. Mutual funds can offer either a Value Fund or a Contra Fund.
   8. Contra Fund: An open-ended equity scheme that follows a contrarian investment strategy. It has a minimum investment of 65% of total assets in equity and equity-related instruments. Mutual funds can offer either a Value Fund or a Contra Fund.
   9. Focused Fund: An open-ended equity scheme that invests in a maximum of 30 stocks. It focuses on a specific segment, such as multi-cap, large-cap, mid-cap, or small-cap. It has a minimum investment of 65% of total assets in equity and equity-related instruments.

• Sectoral/Thematic Fund: An open-ended equity scheme that invests in a particular sector or theme. In a sectoral fund, the minimum investment in equity and equity-related instruments of a specific sector is 80% of total assets. In a thematic fund, the minimum investment in equity and equity-related instruments of a particular theme is 80% of total assets.
• ELSS (Equity-Linked Saving Schemes): ELSS is an equity mutual fund scheme with a statutory lock-in period of three years. It offers tax benefits under Section 80C of the Income Tax Act. ELSS funds have a minimum investment of 80% of total assets in equity and equity-related instruments.
• Bond Funds: Bond funds invest in fixed-income securities such as government bonds, corporate bonds, municipal bonds, or a combination of these. They generate income through regular interest payments and aim to provide stability and income generation. Bond funds can have different durations, credit qualities, and yield objectives, catering to various investor preferences.

Sub-Categories under Debt Schemes include:

1. 1. Overnight Fund: An open-ended debt scheme that invests in overnight securities with a maturity of one day.
   2. Liquid Fund: Liquid funds invest in money-market instruments such as commercial papers, certificates of deposit, and treasury bills with a maximum maturity of up to 91 days.
   3. Ultra Short Duration Fund: An open-ended ultra-short term debt scheme investing in debt and money market instruments with a weighted average tenure of the cash flows for the underlying bond of 3-6 months.
   4. Low Duration Fund: An open-ended low duration debt scheme investing in debt and money market instruments with a weighted average tenure of the cash flows for the underlying bond of 6-12 months.
   5. Money Market Fund: An open-ended debt scheme that invests in money-market instruments with a maturity of up to one year.
   6. Short Duration Fund: An open-ended short-term debt scheme investing in debt and money market instruments with a weighted average tenure of the cash flows for the underlying bond of 1-3 years.
   7. Medium Duration Fund: An open-ended medium-term debt scheme investing in debt and money market instruments with a weighted average tenure of the cash flows for the underlying bond of 3-4 years.
   8. Medium to Long Duration Fund: An open-ended medium-term debt scheme investing in debt and money market instruments with a weighted average tenure of the cash flows for the underlying bond of 4-7 years.
   9. Long Duration Fund: An open-ended debt scheme investing in debt and money market instruments with a weighted average tenure of the cash flows for the underlying bond of more than seven years.

• • Dynamic Bond: An open-ended dynamic debt scheme investing across different durations based on the fund manager’s outlook.
• Corporate Bond Fund: An open-ended debt scheme predominantly investing in the highest-rated corporate bonds. It has a minimum investment of 80% of total assets in corporate bonds (only in the highest-rated instruments).
• Credit Risk Fund: An open-ended debt scheme investing in below highest-rated corporate bonds. It has a minimum investment of 65% of total assets in corporate bonds (investment in below highest-rated instruments).
• Banking and PSU Fund: An open-ended debt scheme predominantly investing a minimum of 80% of its total assets in debt instruments issued by banks, PSUs (Public Sector Undertakings), and public financial institutions.
• Gilt Fund: An open-ended debt scheme investing a minimum of 80% of its total assets in government securities across maturities.
• Gilt Fund with 10-year Constant Duration: An open-ended debt scheme investing a minimum of 80% of its total assets in government securities with a constant maturity of 10 years.
• Floater Fund: An open-ended debt scheme predominantly investing a minimum of 65% of its total assets in floating-rate instruments.

• Money Market Funds: Money market funds invest in short-term debt instruments with high credit quality and low-risk profiles. These funds aim to provide liquidity and stability, making them suitable for investors looking to preserve capital while earning a competitive rate of return. Money market funds typically invest in Treasury bills, commercial paper, certificates of deposit, and other short-term instruments.
• Balanced Funds: Balanced funds, also known as hybrid funds, invest in a mix of both equities and fixed-income securities. They aim to provide a balanced approach by offering potential capital appreciation from equity investments and income generation and stability from fixed-income investments. The allocation between equities and fixed income can vary based on the fund’s objective.

The Types of Balanced Funds are as follows:

1. 1. Conservative Hybrid Fund: An open-ended hybrid scheme that predominantly invests in debt instruments. It allocates 10-25% of its assets in equity and equity-related instruments and 75-90% of its assets in debt instruments.
   2. Balanced Hybrid Fund: An open-ended balanced scheme that invests equally in equity and debt instruments at a ratio of 40-60%. Asset Management Companies (AMCs) are not permitted any arbitrage in these schemes. Mutual funds will be allowed to offer either an aggressive hybrid fund or a balanced fund.
   3. Aggressive Hybrid Fund: An open-ended hybrid scheme that predominantly invests (65-80%) in equity and equity-related instruments. The remaining balance of 20-35% is invested in debt instruments. Mutual funds will be permitted to offer either an aggressive hybrid fund or a balanced fund.
   4. Dynamic Asset Allocation or Balanced Advantage Funds: An open-ended dynamic asset allocation fund that invests in equity and debt instruments based on market conditions and the fund manager’s discretion.
   5. Multi-Asset Allocation: An open-ended scheme that invests in at least three asset classes, allocating a minimum of 10% in each asset class. Foreign securities are not treated as a separate asset class.
   6. Arbitrage Fund: An open-ended scheme that invests in arbitrage opportunities, following an arbitrage strategy. The minimum investment in equity and equity-related instruments is 65% of total assets.
   7. Equity Savings: An open-ended scheme that invests in equity, arbitrage, and debt. The minimum investment in equity and equity-related instruments is 65% of total assets, and the minimum investment in debt is 10% of total assets. The minimum hedged and unhedged proportion should be stated in the Scheme Information Document. Asset allocation under defensive considerations may also be stated in the offer document.

• Index Funds: Index funds aim to replicate the performance of a specific market index, such as the S&P 500 or the FTSE 100. These funds invest in a portfolio of securities that mirror the composition and weightings of the chosen index. Index funds typically have lower expense ratios compared to actively managed funds, as they require less active decision-making by fund managers.
• Sector Funds: Sector funds focus on investing in specific sectors of the economy, such as technology, healthcare, energy, or financial services. These funds concentrate their investments in a particular industry or sector, providing investors with targeted exposure to a specific segment of the market. Sector funds can be higher risk and more volatile compared to diversified funds due to their concentrated nature.
• Target-Date Funds: Target-date funds are designed to align with a specific retirement date or investment horizon. These funds gradually adjust their asset allocation over time, becoming more conservative as the target date approaches. They typically offer a diversified mix of equities, bonds, and other asset classes suitable for investors with specific retirement goals.
• Fund-of-Funds: Fund-of-funds, also known as multi-manager funds, invest in other mutual funds rather than directly in securities. These funds offer diversification across different mutual funds managed by various fund managers or investment firms. Fund-of-funds are suitable for investors looking for a convenient way to gain exposure to multiple asset classes and investment styles.

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