Finance is a vast subject with several branches. The modern business world is changing rapidly in terms of its functioning. One has to be familiar with the terminologies associated with the finance world. By understanding various financial terms and the mechanism in which it functions, one can reach great heights.
This website, ‘Simplified Fiscal Affairs’ presents to you the various topics/concepts in the form of series and imparts the knowledge in a simplified way.
Mutual Funds:
Mutual fund refers to a large pool of money invested in proportions, in the stock exchange by sound professional expert known as the finance manager. Mutual funds are ideal for investors who either lack large sums for investment, or for those who do not have the time to research the market, yet want to grow their wealth. The money collected in mutual funds is invested by professional fund managers according to the scheme’s stated objective. In return, the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).
Actively managed mutual funds refer to those funds which are actively and attentively managed and monitored by the financial experts, whereas, Passively managed mutual funds refer to those which have a set of predefined rules and regulations. Comparatively lesser fees are charged by these financial experts.
Mutual funds are started by the Asset Management companies. Investment of money is a complex decision, finding the right avenues, the rate of return, significant timeline are the major elements or factors which need to be taken into consideration.
Net Asset Value (NAV):
- NAV abbreviation stands for “Net Asset Value”. The performance of a specified mutual fund is denoted by its Net Asset Value (NAV). As shares have a market traded price, similarly, mutual funds are assigned a net asset value per unit. The NAV of mutual funds fluctuates daily depending on the performance of the underlying assets. It is required to be disclosed on a daily basis.
- The NAV per unit is the market value of securities of a particular mutual fund divided by the total number of units of the scheme on any specified date.
NET ASSET VALUE (NAV) = Fund Assets - Fund Liabilities / Total Number of Units Outstanding
Equity Mutual Funds:
Equity mutual funds as the name suggests, have a major investment in the equity related instruments. The investment in equity mutual funds is risky as the value of investments can fluctuate as per the prevalent market conditions.
Diversified Equity Fund or Multicap:
A diversified or a multicap mutual fund invests the funds in the large, medium and small cap companies in certain proportions. Multi-cap funds is a category of mutual fund that invest across various market capitalisations, including large-cap, mid-cap, and small-cap stocks. This diverse approach allows fund managers to make amendments as per the changing market conditions, allocating assets strategically based on prevailing opportunities.
Large Cap Funds:
The SEBI (The Securities and Exchange Board of India) has put forth a criteria for the appropriate classification of the companies. The top 100 companies listed in the stock market based on market capitalization are classified as large-cap companies. The mutual funds that make investments in the companies from the large-cap are known as large cap funds. The market cap for these companies is around Rs.20000 crores and more, and they have a strong market presence. Large-cap funds have a lesser risk profile compared to the others. In large-cap funds, they invest in stocks that are in the top 100 companies.
Mid Cap Funds:
SEBI established a rule in the year 2017, according to which companies that are ranked from 101 to 250 in terms of market capitalization are known as mid-cap companies. The market cap for these companies will be around Rs.5000 to Rs.20000 crores. The mutual funds that make investments in the companies from the mid-cap are known as mid cap funds.
Mid-cap companies also have a good track record, but the difference is noticeable compared to large-cap companies. Mid-cap funds are involved with more risk than large-cap funds. Mid-cap companies may or may not be included in broad market indexes due to their limited market presence. Mid-caps are slightly riskier than large-cap stocks and less risky than small-cap stocks.
Small Cap Funds:
The companies ranked from the 251st position onwards in terms of market capitalization are known as small-cap companies. Small Cap mutual funds are equity mutual funds that invest in small-cap stocks. Small-cap funds are those with a market capitalization of less than Rs. 5,000 crore.
The mutual funds that make investments in the companies belonging to the small-cap are known as small cap funds. Small-cap stocks are riskier than the other two. Despite the risk, these stocks have great growth potential.
Equity Linked Saving Scheme (ELSS):
Equity linked saving scheme (ELSS) is a special kind of equity fund whereby, one can save taxes by investing in this fund.
Sector Mutual Fund/ Thematic:
Sectoral investment is made under this category of mutual fund. These funds in comparison to other funds are risky as returns are entirely based upon a single sector and its performance. For example, UTI transportation and logistics fund.
Flexi Cap Fund:
- A flexi cap fund is a mutual fund that invests in a variety of stocks across different market capitalizations, including large-cap, mid-cap, and small-cap stocks. The fund manager can change the allocation of the fund based on market conditions, opportunities, and valuations.
- Flexi cap funds offer the flexibility to invest in companies across all market capitalization sizes. However, flexi-cap funds offer additional flexibility to the fund manager. They can choose to avoid mid and small-cap stocks entirely if they prefer. Moreover, they have the freedom to allocate a larger portion of the portfolio to large-cap stocks, especially during periods of economic downturn or market volatility.
- In flexi-cap funds, there are no set limits on the percentage of funds that the manager can allocate to each category, whether large-cap, mid-cap, or small-cap. This flexibility allows the fund manager to adapt the portfolio composition based on market conditions and investment strategies. However, as per the SEBI, the fund has to make at least 65% investments in equity and equity related instruments.
Contra Fund:
- A contra fund is a form of mutual fund that invests in the opposite direction of the market. These funds follow a contrarian approach. In simple words, contra fund managers go against the current market trends. They look for undervalued stocks which have strong fundamentals, yet are not favoured by the market.
- Contra funds invest in stocks that are now out of favour or undervalued, as opposed to popular and performing well stocks. The main motive of contra funds is to go against the current market conditions and invest in assets that are presently underperforming due to short-term factors.
Value Funds:
Value fund managers identify and invest in undervalued stocks with strong fundamentals and the potential for long-term capital appreciation.
Index Funds:
- Index fund is a popular term in the mutual fund selection category. Index funds are directly linked to the stock exchange indices. These funds are passively managed that no agent of Asset Management company is looking at where to invest the money, they already have a set of predefined rules and regulations and a framework to follow. The fund manager invest the funds in such companies which come under the index. For example, money will be entirely invested in the companies which come under the NIFTY 50.
- It is observed that Index funds carry the potential to deliver the best returns in comparison to investments made in any other mutual fund categories, as these funds are directly linked to the market thereby, provide with the accurate and high returns in the long run.
Dividend Yield Funds:
Dividend yield funds as the name suggests are those funds which primarily focus on investing in stocks or securities of companies with a history of paying high dividends relative to their share price. The mechanism of these funds is as to provide investors with regular income in the form of dividends along with the potential for capital appreciation.
Debt Mutual Funds:
Debt mutual funds are those funds which are invested in debt instruments such as bonds, debentures, certificates of deposits, etc.
Liquid Funds:
These refer to such funds which can easily and quickly be converted into cash. In economics, liquid refers to something which can be easily converted into cash. This type of funds have a comparatively low risk and can be considered as an alternative to savings account.
They are prohibited to invest in risky assets, as specified by the SEBI rules and regulations. These standards make sure to limit credit risk in the liquid fund portfolio.
Guilt Fund:
Guilt funds are those which primarily make investments in government issued securites, it practically has zero risk as it is safe to invest money with the government. These funds have no risk of default of interest or principal amount but gets affected by interest rate fluctuation as the Government borrowing typically happens to be for a longer duration.
Fixed Maturity Plans (FMPs):
Fixed maturity plans are a type of debt mutual fund that invests the money in fixed income securities such as bonds, certificates of deposit, commercial papers, etc. They have a fixed maturity date, which means they lock in your money for a specified period of time, ranging from a few months to a few years. Fixed maturity plans are considered as an alternative to fixed deposit, as risk associated to these funds is less and the returns are better in comparison to fixed deposits.
Corporate Bond Fund:
These funds invest in corporate bonds. Companies issue bonds for expansion, diversification, modernization and to meet expenses and finance other activities. The yield and risk are generally higher than government and most municipal bond funds.
Hybrid Mutual Funds:
Hybrid mutual Fund is a unique and special term which has a mixture or combination of debt and equity mutual funds.
Everyone has a different perspective when it comes to taking sound investment decisions. Some people want to invest money in the stock markets but not the entire amount as investment in stock exchange has a considerable and significant risk associated to it. They want a fair balance between the stock exchange and debt instruments. Hybrid mutual fund is the best possible solution if one wants a perfect combination or balance between the equity and debt mutual funds.
Arbitrage Fund:
Arbitrage funds are hybrid mutual funds that yield returns by using the mechanism of simultaneously buying and selling (trading) of securities in different markets to take advantage of fluctuations in prices. For example: one commodity is purchased at a lesser price, at one place and later on sold at a higher price at some different place.
Aggressive Hybrid Fund:
- Aggressive hybrid mutual funds invest in both equity and debt/bonds. However focus on stocks is higher with 65-80% of total investments in stocks and remaining in bonds.
- These funds invest between 65%-80% of their total assets in equity and equity-related instruments and the balance 20%-35% in debt securities and money market instruments.
- Hybrid funds are considered to be riskier than debt funds but safer than equity funds.
Conservative Hybrid Funds:
- These mutual funds invest in both equity and debt/bonds. However, the focus on bonds is higher with 75-90% of investments in bonds and rest in equity.
- As the name suggests, conservative hybrid fund is a type of hybrid fund that invests significantly in debt instruments. It should have a minimum of 75% in debt instruments and a maximum of 90% in debt instruments. The rest 10% to 25% of the portfolio is invested in equities. Conservative Hybrid funds invest primarily in FD-like instruments with some allocation to stocks. These funds look to provide more returns than bank fixed deposits without taking too much risk.
Multi Asset Allocation Fund:
- Multi Asset Allocation Funds are hybrid funds that must invest a minimum of 10% in at least 3 asset classes. These funds typically have a combination of equity, debt, and one more asset class like gold, real estate, etc. Lesser risk than most hybrid funds as the investments are spread across multiple asset classes.
- Provide investors with a single investment that combines debt, equities, and one additional asset class such as real estate, gold, and so on. Furthermore, these schemes employ various asset allocation algorithms that are designed to respond to changing market situations. These characteristics provide this form of mutual fund the ability to provide investors with the best risk-adjusted returns.
Equity Savings Funds:
Equity savings funds are open-ended mutual fund programs that fall under the SEBI’s Hybrid category. These funds make money by investing in stocks, bonds, derivatives, and arbitrage. It is a newer financial vehicle in the Indian market, and it is thought to be safer than pure equity funds and more tax-efficient than pure debt funds.
Dynamic Asset Allocation or Balanced Advantage:
Balance Advantage Funds invest in a mix of stocks and FD-like instruments. However, they keep changing this allocation based on the market conditions to provide with optimal returns with minimal risk. Balance Advantage Funds also known as Dynamic Asset Allocation Funds.
Solutions Oriented:
Children’s Fund:
Childrens’s mutual funds invest in stocks and bonds. These funds have a lock in period of 5 years or till the child attains age of majority(whichever is earlier). This come under the category of solution oriented mutual funds as it provides with the solution in regards to the costs associated to children’s education and future expenses.
Retirement Fund:
A retirement fund, or pension fund, is a long-term investing scheme that allows one to set aside a sizeable portion for retirement period. A retirement mutual fund is a specialised investment strategy created to meet the long-term financial goals of retirement planning. These funds are managed by Asset Management Companies (AMCs).
Investment Cum Insurance:
Investment insurance offers the advantages of both insurance (through a life cover) and investment (market-linked returns). It provides with an assured life cover amount in the case of an unfortunate event and, at the same time, helps you grow your money and generate returns for your financial goals. For example, ULIPs (Unit Linked Insurance Plans) are insurance cum market-linked investment option that provide the investor both investment and insurance in a single plan.
DISCLAIMER:
Investment in securities market are subject to market risks, read all the related documents carefully before investing.
The information presented on this website is with the objective of imparting financial knowledge and for informational purposes only, not a substitute for any professional financial advise.
We have made sure to provide information with atmost accuracy. Regardless of anything, financial information imparted through this website should not be considered as an offer to make investment decisions.
You must consult a qualified financial advisor before making any actual investment.
