People are inclined towards savings and for the same purpose they seek different kinds of financial instruments. Bank term deposits and governments bonds may have been the favourite of investors in past, but the scenario is changing rapidly with many moving towards equities and mutual funds.
Mutual funds are professionally managed collective investment vehicles that gather funds and channelize them towards market instruments. Unlike equities, they carry no direct risk as fund managers use their expertise and knowledge to make wise investment decisions.
Depending on the nature of underlying instruments used to channelize funds, there are different types of mutual funds that will help to diversify market risk and gain capital appreciation.
- Growth Fund:
Growth funds are also called as Equity funds as the underlying instruments used are stocks or equities of private sector companies. The primary objective of such investment is long term capital appreciation. Such funds target the high-paying stocks from small-cap, mid-cap and large-cap equity segments and exploit market movements to book profits. The pay-out is significant (above 15to 20%) while the risk is moderate.
- Debt Funds
Popular as bond or income funds, these schemes predominantly invest in the low-risk instruments like stocks, bonds, CDs, warrants, etc. The risk associated with such instruments is very low, and the pay-out is assured. Such schemes are best suited for conservative investors who look for steady returns over a long period of time. The returns offered by such funds lie in range of 8 to 15%.
- Money Market funds
These schemes are designed for individuals who look out for high liquidity in investments along with moderate gains. These schemes specifically invest in short term debt instruments like Treasury Bills. The return rate is around 6%, but the risk associated with the investment is very low. Unlike other schemes, these funds can be redeemed within a single day.
- Balanced Funds
These are special funds that have a moderate risk profile. The fund managers of such schemes have a diversified portfolio that consists of equity as well as debt instruments. The ratio of this combination varies from scheme to scheme. Based on the underlying portfolio combination, balanced or hybrid funds are also categorized as growth and income funds. The return rate offered is around 12 to 15%.
- Index Funds
To mitigate the risk of equities and to assure better returns to investors, certain fund managers invest directly in the index-related instruments of the stock market. This distributes market risk and investors get better assurance of returns.