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Free Wealth Management advice on Mutual Funds, Insurance, Bonds, Post Office Saving Schemes and Small Savings
Free Wealth Management advice on Mutual Funds, Insurance, Bonds, Post Office Saving Schemes and Small Savings
   

   
Free Wealth Management advice on Mutual Funds, Insurance, Bonds, Post Office Saving Schemes and Small Savings
Free bse nse stock tips on mobile by sms
MUTUAL FUNDS BASICS
Why Mutual Funds?
The Benefits of Mutual Funds
Types of Mutual Funds
The Power of Automatic Investing
The Magic Of Compounding
The Importance of Performance
Understanding Fees and Expenses
Selecting Funds for Your Portfolio
Redeeming Your Shares
Free Home Delivery of Mutual Fund Forms New!!
Types of Mutual Funds

This section provides descriptions of the characteristics -- such as investment objective and potential for volatility of your investment -- of various categories of funds. These descriptions are organized by the type of securities purchased by each fund: equities, fixed-income, money market instruments, or some combination of these.

This table organizes these fund types by how aggressive or conservative they are and by investment objective. Because mutual funds have specific investment objectives such as growth of capital, safety of principal, current income or tax-exempt income, you can select one fund or any number of different funds to help you meet your specific goals. In general mutual funds fall into these general categories:

  • Equity Funds invest in shares of common stocks.

  • Fixed-Income Funds invest in government or corporate securities which offer fixed rates of return.

  • Balanced Funds invest in a combination of both stocks and bonds.

  • Money Market Funds for high stability of principal, liquidity and income.

  • Bond Funds, both tax-exempt and taxable funds to generate income.

  • Specialty/Sector Funds to diversify holdings within an industry.


 

Equity Funds

 

Aggressive Growth Funds
What they invest in:
These funds seek maximum growth of capital with secondary emphasis on dividend or interest income. They invest in common stocks with a high potential for rapid growth and capital appreciation.

Because they invest in stocks which can experience wide swings up or down, these funds have a relatively low stability of principal. They often invest in the stocks of small emerging growth companies and generally provide low current income because these companies usually reinvest their profits in their businesses and pay small dividends, if any. Aggressive growth funds generally incur higher risks than growth funds in an effort to secure more pronounced growth. These funds may invest in a broad range of industries or concentrate on one or more industry sectors. Some use borrowing, short-selling, options and other speculative strategies to leverage their results.
Suitable for:
Investors who can assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income.
Growth Funds
What they invest in:
Generally invest in stocks for growth rather than current income.

Growth funds are more likely to invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential.

Growth funds provide low current income, but the investor's principal is more stable than it would be in an aggressive growth fund. While the growth potential may be less over the short term, many growth funds have superior long-term performance records. They are less likely than aggressive growth funds to invest in smaller companies which may provide short-term substantial gains at the risk of substantial declines.

Suitable for:
Although growth funds are more conservative than aggressive growth funds, they are still relatively volatile. They are suitable for growth-oriented investors but not investors who are unable to assume risk or who are dependent on maximizing current income from their investments.
International/Global Funds
What they invest in:
International funds seek growth through investments in companies outside the United States. Global funds seek growth by investing in securities around the world, including the United States. Both provide investors with another opportunity to diversify their mutual fund portfolio, since foreign markets do not always move in the same direction as the U.S.

The best way to invest abroad is through mutual funds, rather than direct investment in a foreign security. Most investors are unfamiliar with foreign investment practices and currencies and may not have a clear understanding of how economic or political events can affect foreign securities. An investor in an international mutual fund doesn't have to worry about trading practices, recordkeeping, time zones or other laws and customs of a foreign country -- that is all handled by the fund's money manager.

International and global funds can invest in common stocks or bonds of foreign firms and governments. Many international funds invest in a particular country or region of the world.
Suitable for:
While international and global funds offer opportunities for growth and diversification, these types of funds do carry some additional risks over domestic funds and should be carefully evaluated and selected according to the investor's objectives, timeframe and risk profile. Because most international and global funds are considered to be aggressive growth funds or growth funds, investors must be willing to assume the risk of potential loss in value in the hope of achieving substantial gains. They are not suitable for investors who must conserve their principal or maximize current income.
Growth and Income Funds
What they invest in:
Growth and income funds seek long-term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds.

Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks.
Suitable for:
Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income.


 

Fixed Income Funds
 
What they invest in:
The goal of fixed income funds is to provide high current income consistent with the preservation of capital. Growth of capital is of secondary importance.

Income funds that invest primarily in common stocks are classified as equity income funds (see next listing). Those that invest primarily in bonds and preferred stocks are classified as fixed-income funds. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return.

Since bond prices fluctuate with changing interest rates, there is some risk involved despite the fund's conservative nature. When interest rates rise, the market price of fixed-income securities declines and so will the value of the income funds' investments. Conversely, in periods of declining interest rates, the value of fixed-income funds will rise and investors will enjoy capital appreciation as well as income.

Fixed-income funds offer a higher level of current income than money market funds, but a lower stability of principal. They are generally more stable in price than funds that invest in stocks. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities.

Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the Government of India. These include securities issued by the U.S. Treasury, the Government National Mortgage Association ("Ginnie Mae" securities), the Federal National Mortgage Association ("Fannie Maes") and Federal Home Loan Mortgage Corporation ("Freddie Macs"). All are backed by pools of mortgages.
Suitable for:
Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so. Again, carefully read the prospectus to learn if a fund's investment policy with respect to yield and risk coincides with your own objectives.


Balanced/Equity Income Funds
 
What they invest in:
Equity income funds seek high current yield by investing primarily in equity securities of companies which pay high dividends. Unlike interest payments on bonds, dividends on equity securities can change as companies raise or lower their dividends. Since yield-oriented stocks are more volatile than comparably rated fixed-income securities, equity income funds offer less stability of principal than fixed-income funds. Balanced funds are more evenly invested in equities and income securities.
Suitable for:
Balanced and equity income funds are suitable for conservative investors who want high current yield with some growth.

 

Money Market Funds
 
What they invest in:

For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly-liquid, virtually risk-free, short-term debt securities of agencies of the Government of India, banks and corporations. They have no potential for capital appreciation.

Tax-exempt money market funds invest in securities that provide safety of principal, liquidity and income exempt from federal income taxes by investing in short-term, high-rated obligations.

Because of their short-term investments, money market mutual funds are able to keep a constant share price; only the yield fluctuates. Therefore, they are an attractive alternative to bank accounts. With yields that are generally competitive with -- and usually somewhat higher than -- yields on bank certificates of deposit (CDs), they offer several advantages:

  • Money can be withdrawn any time without penalty. Money market funds also offer check writing privileges.

  • Money market funds are suitable for conservative investors who want high stability of principal and moderate current income with immediate liquidity.

Suitable for:

Money market funds are suitable for conservative investors who want high stability of principal and moderate current income with immediate liquidity.

 

Specialty/Sector Funds

 

 
What they invest in:
These funds invest in securities of a specific industry or sector of the economy such as health care, high technology, leisure, utilities or precious metals.

Because such funds invest primarily in one sector, they do not offer the element of downside risk protection found in mutual funds that invest in a broad range of industries. However, the funds do enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company.

Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor.

While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly-diversified portfolio and attempt to mirror the performance of various market averages. Index funds generally buy shares in all the companies composing the Sensex & Nifty or other broad stock market indices.

Asset allocation funds move funds among a variety of markets and instruments in response to the fund manager's view of relative market prospects. They are broadly diversified and sometimes have higher management fees since there may be a variety of securities in the portfolio. These funds are suitable for investors who can tolerate a moderate to high degree of risk, are seeking capital appreciation and to whom dividend income is secondary in importance. And whatever the instruments, social responsibility funds apply moral and ethical as well as economic principles in the selection of securities.
Suitable for:
Specialty funds are suitable for investors seeking to invest in a particular industry who can monitor industry performance regularly and alter investment strategies accordingly. Investors must be willing to assume the risk of potential loss in value of their investment in the hope of achieving substantial gains. They are not suitable for investors who must conserve their principal or maximize current income.