Trading in a mutual fund in share is different from trading in stock or exchange-traded funds. The enormous fund is available for buying the shares and the fees charged for the fund is complicated. It has a large impact on investment in mutual fund. In India, the first mutual fund was set up in 1964. The following is a guide to investors for the beginners.
What is a mutual fund?
A mutual fund is a professionally managed investment company which, takes money from investors and pool it into a large basket called portfolio. And that money is invested in different assets such as stocks, bonds, commodities and real estate. Due to the fee structure of the mutual fund, it is designed for a long-term investor and not for frequent trading.
It is widely diversified, thereby it minimizes the risk of investment and attracts investors. There are different types of mutual fund. Some of the common mutual funds are as follows
Money market mutual funds
Investments are made in short-term fixed income such as government bonds, treasury bills, banker’s acceptance, commercial paper and certificate of deposits. Comparing to other mutual funds it is considered to be safer in investment, but lower potential returns.
Equity fund or growth fund
Equity fund invests money into the shares of various companies. The rise or drop in price in the share depends upon the share market. The price they pay for each unit of equity mutual fund is called Net asset value (NAV). The investment activities in these funds are maintained by professional managers, who have good knowledge about the funds. It includes funds for the infrastructure, fast moving goods, and few banks.
Fixed income bond
These investments are made at a fixed rate of return like government bonds, highly corporate bonds, debentures and commercial papers, etc. The investments made in this will be safer and considered to be suitable for income generation.
These invest in a mix of assets called stock and bond and the aim of the fund is to balance the income against the risk of losing money.
An index fund is also called an index tracker, designed to track the particular index. The value index will be increasing or decreasing. Example for an index fund is BSE Sensex
It focuses on investments like real estate, commodities and social responsibility such as which supports the environment, human rights, and diversity.
It is also called as a multimanager fund which invests in other mutual funds.
Certain investment strategies are followed in purchasing shares of the fund. They are
Value investing strategy is popularized by Ben Graham in 1930s.In this strategy, the stocks of companies are trading at a significant discount to their intrinsic value. Comparing to other mutual funds, the value investing has 20-30% lower P/E.
b) Contrarian investing
It is characterized by purchasing and selling against prevailing market sentiment or trend.
c) Momentum investing
This investment strategy aims to capitalize on the continuance of existing trends in the market. The investments are made in the industries which have strong momentum.