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Mutual Funds Decoded – The Ultimate Guide To This Financial Cushion [Part 2]

types of mutual funds

In the last part we learnt about mutual funds that were ‘no risk’ or ‘low risk’ funds. In part two we will read about some other kinds of mutual funds which range from mid to high risk investments. These offer better returns compared to the ones discussed in part one and can form a good part of your financial portfolio .

Equity Funds

The most common kind of mutual funds. These are funds that pool in their money into the equity shares of companies. Highly volatile, these funds can offer high returns due to the fluctuating price of the stock market.

Pros and Cons

Equity funds have a high risk and return ratio. In a season of stock market boom, return on investment in these funds can skyrocket. Though however, in a slowdown – an investor can end up making considerable losses. Another issue with equity mutual funds is the constant linkage to the ever unstable share market which is relatively absent in the funds mentioned in part one.

Who should Invest

Young investors, first timers and investors with a relatively mild to high risk appetite should go in for a equity MFs. These provide a good growth rate over the years and can help accumulate a large amount with a short span of time to fulfill short term and long term goals.

Specialty Funds

Auto sector, Financial services, FMCG, manufacturing, digital, ecommerce – We all have favorites. Specialty funds have favorites too. These MF’s are sector specific and only invest in sums of a particular sector. For example – a sustainability fund will only invest in companies whose primary business is related to environmental sustainability.

Pros and Cons

Investing in a sector fund gives an investor to make hay while the sunshines. If in the current scenario for instance, digitisation is on an upswing, technology companies are surely expected to be in demand – thus investing in technology sector funds will reap good returns. However, diversification in this kind of an MF is relatively low, hence the risk of losses being quiet high. Since all the investee companies in these MF’s are in one sector – if the sector as a whole is suffering losses (for example the auto and real estate sector), the investment returns will go in for a toss.

Who should invest

Swift and alert investors looking to make a quick buck by leveraging on current trends should take the advantage of these kind of MF’s. These MF’s are also good for investors who want to gain a long term profit and have the patience to wait for the revival and growth of a sector.

Funds of Funds (FoF)

Pooling in the investor money received and investing in another MF. This is what FoFs in a nutshell are. This is a vast category of MF’s offering the highest level of diversification possible. The portfolio of an FoF basically contains other MFs that they have invested in.

Pros and Cons

FoF’s in most cases lack transparency, as the investor is not aware about the layers of funds that are invested in. Additionally, these MF’s have higher service and management costs attached to it while offering relatively lower returns. This is primarily because FoF’s tend to pass on the management and handling fees of the funds they have invested in, in also to the final customer.

Who should invest

For the amount of expenses involved, FoFs are not really worth the deal. However, it can be quite a lucrative proposition if the returns expected are high enough to set off all the expense related set backs. First timers, who don’t want to get into the researching of which MF to choose for their financial goals can simply put their money into an FoF that offers a wide variety of diversified portfolios.

In Mutual Fund parlance, these are some of the major funds that an investor should know about. In the parts following from here, we will decode each kind of mutual fund and the terminology associated with it.

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