Mutual Fund Examples: Exploring Meaning, Types and Objectives

Investors can access a wide range of investment options, and mutual funds are one feasible option. However, like all investment types, mutual funds come with their own set of risks. Investors must evaluate these risks and the expected returns, considering any tax implications. Comparing investment options and consulting with financial advisors, including mutual fund agents and distributors, can provide valuable insights for making informed decisions. So, let’s explore all about mutual funds with real mutual fund examples in detail:

What is Mutual Fund?

A mutual fund (MF) collects money from investors to invest it into a diversified, professionally managed portfolio of securities like stocks, bonds, money market instruments etc., to aim for returns while reducing risk.

What is mutual fund in simple words? It allows investors to participate in broader markets with smaller amounts through the expertise of a fund manager. The combined holdings of stocks, bonds, or other assets are the mutual fund’s portfolio. Each investor owns mutual fund ‘units’, representing a share of holdings in the portfolio.

The fund manager and his research team have the expertise to analyse markets and select assets to construct a portfolio aligned with the scheme’s stated investment objective. This makes mutual funds ideal for retail investors, who may lack the knowledge or time to invest directly in the capital market.

How do Mutual Funds Work?

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Here’s how they work:

• Pooling of Funds: Investors contribute money to the mutual fund, which a professional fund manager manages.
• Investment Strategy: The fund manager uses the pooled money to buy a mix of securities according to the fund’s investment objectives, such as growth, income, or stability.
• Diversification: Mutual funds invest in various assets, reducing the risk by spreading investments across different sectors and companies.
• Professional Management: Fund managers decide whether to buy, hold, or sell assets based on market analysis, aiming to maximise returns while managing risks.
• Net Asset Value (NAV): The value of a mutual fund’s shares is determined by its Net Asset Value (NAV), which is calculated daily based on the total value of the fund’s holdings divided by the number of shares outstanding.
• Types of Mutual Funds: There are various types, including equity funds, bond funds, balanced funds, and index funds, catering to different risk appetites and investment goals.
• Returns and Risks: Investors earn returns through dividends, interest, and capital gains, though returns are not guaranteed and depend on market performance.
• Liquidity: Mutual fund shares can be bought or sold at the current NAV, providing liquidity to investors.
• Fees and Expenses: Investors pay management fees and other expenses, which are deducted from the fund’s returns.

What are Types of Mutual Funds With Examples?

Understanding what is mutual fund and its types is crucial for making informed investment decisions. Here are types of mutual fund examples based on asset class and investment strategy:

Based on Asset Class

1. Equity Funds

The equity funds invest a minimum of 65% in equities. Some equity mutual fund examples include:

• Large Cap Funds: Invest in large, established companies that offer relative stability.
• Mid-Cap & Small Cap Funds: These funds focus on medium—and small-sized companies, which may be more volatile but offer higher growth potential.
• Sector & Thematic Funds: Invest in specific sectors or themes, such as technology or rural development.

2. Debt Funds

It invests at least 65% in fixed-income instruments. Mutual fund examples include:

• Liquid Funds: Invest in very short-term instruments with maturities of up to 91 days.
• Short Duration Funds: Have maturities between 1-3 years and moderate interest rate sensitivity.
• Medium & Long Duration Funds: Focus on instruments with maturities above three years, featuring higher interest rate risk.

3. Hybrid Funds

It combines equities and debt. Mutual fund Examples are:

• Equity Savings Funds: Minimum 65% in equity, 10% in debt and some in derivatives.
• Balanced Advantage Funds: Adjust equity exposure dynamically based on market conditions.
• Multi Asset Allocation Funds: Invest in equities, debt, and gold.

Based on Investment Strategy

1. Growth Schemes

Target long-term capital appreciation by investing in high-growth stocks with low dividend payouts.

2. Income Schemes

Focus on regular income through stock dividends with solid dividend histories.

3. Index Schemes

Aim to replicate the returns of a market index, such as the Nifty or Sensex, by mirroring its composition.

4. Exchange Traded Funds (ETFs)

Track an index but trade on exchanges like stocks, offering transparency and diversification.

What are the Objectives of Mutual Funds?

Each mutual fund scheme has specific objectives outlined in the Scheme Information Document (SID). Here’s what mutual funds aim to achieve:

1. Wealth Creation

Equity funds are designed for long-term capital growth through the power of compounding.

2. Regular Income

Debt and hybrid funds focus on providing consistent income and capital stability, which is beneficial for retirement planning.

3. Market Linked Returns

Funds that follow popular benchmarks like Sensex or Nifty offer performance linked to these indices.

4. Diversification

Investing across various asset classes and companies to mitigate risk.

5. Liquidity

Offering easy entry and exit based on daily NAVs, compared to more illiquid assets like property or gold.

6. Tax Efficiency

Equity funds offer tax advantages if held for more than a year, while interest from debt funds is taxed at the marginal tax rate.

How to Invest in Mutual Funds?

Investing in mutual funds is convenient, transparent and regulated. Here are the key steps:

1. Identify Investment Objective

Set clear goals for investment, such as children’s education, retirement, etc., and the expected time horizon. This helps select suitable fund types and schemes.

2. Choose the Right Fund

Analyse historical performance across rising and falling markets, the fund manager’s track record, costs, portfolio characteristics like diversification, etc., before deciding to invest.

3. Investment Channels

Invest online on fund house websites or platforms. Other options include designating bank accounts, offline forms and stock exchange platforms.

4. Monitor Performance

Periodically review scheme performance w.r.t. chosen benchmark and peers. Take necessary actions like rebalancing to stay on track towards your goals.

What is Expense Ratio in Mutual Fund With Example?

The expense ratio of a mutual fund is the annual fee expressed as a percentage of the fund’s average assets under management (AUM). It includes management fees, administrative costs, and other expenses. For example, if a mutual fund has an expense ratio of 1%, and the fund’s AUM is ₹10 lakh, the annual expenses would be ₹10,000. A lower expense ratio means lower costs for investors.

Conclusion

Understanding mutual funds explained, including mutual fund examples and the concept of mutual funds can significantly enhance your investment strategy. You can make more informed decisions by exploring what is mutual funds definition and its types of mutual funds, their objectives, and how mutual fund works with real mutual fund examples.

Whether you’re interested in growth, income, or diversification, there’s a mutual fund to meet your needs. Evaluate your investment goals, risk tolerance, and preferences before investing. Keep your portfolio costs low and review them periodically to align with your financial goals.

FAQs

1. What is a mutual fund?

A mutual fund pools money from numerous investors and professionally invests it in various assets like equity, debt, etc. to generate returns. Each investor’s share reflects their part of the fund’s holdings in different securities.

2. What are the main types of mutual funds?

Major mutual fund types are equity funds, debt funds, hybrid funds, index funds, sector funds etc., based on assets invested in stocks, bonds etc., and investment strategy followed.

3. What are the main objectives of mutual funds?

Key mutual fund objectives are long-term capital appreciation, regular income through dividends/interest, tax savings through ELSS funds, and meeting specific financial goals via tailor-made fund categories catering to needs.

4. How do mutual fund schemes work?

Fund managers choose where to invest money from investors per stated scheme objectives to optimise returns. Profits/dividends from holdings and NAV appreciation provide investor gains.

5. What are the main benefits of mutual funds?

Key benefits offered are professional management, diversification, liquidity, flexibility, transparency, regulation and affordability making them accessible for retail investors.

6. How are mutual funds better than direct investing?

Individual investors may not have the knowledge, efficiency, and resources to diversify and directly pick the best securities across assets—mutual funds fulfil this vital need.

Author: All Content is verified by SMC Global Securities.