Mutual funds are investment vehicles that gather money from multiple investors to purchase a diverse range of stocks, bonds, and other securities. They offer professional management and diversification, making them accessible to individual investors.
Mutual Fund types according to asset class
- Equity mutual funds: These funds mainly invest in stocks and are suitable for investors seeking growth opportunities through stock market exposure. They may offer high returns but may also come with higher risk.
- Debt mutual funds: These funds invest in fixed-income securities such as bonds and are suitable for investors seeking steady returns with lower risk compared to equity mutual funds.
- Hybrid mutual funds: These funds invest in a combination of equities and debt, providing a balance between potential capital appreciation and regular income. They might be suitable for investors seeking a diversified portfolio.
Mutual Fund types according to structure
- Open-ended funds: Investors can buy or sell units anytime based on the fund’s Net Asset Value (NAV). Examples include index mutual funds and exchange traded funds (ETFs). Open-ended funds offer flexibility and are a good option for those looking to invest regularly or make changes to their investments.
- Close-ended funds: These funds have a fixed number of units and are only open for investment during a specified period. After the fund closes, units can be bought or sold on stock exchanges based on market conditions.
Features of mutual funds
- Diversification: Mutual funds may invest in various assets, which can help reduce risk by spreading investments across different sectors and securities.
- Professional management: These funds are managed by experienced professionals who make investment decisions on behalf of investors, aiming to maximize returns and manage risk.
- Liquidity: Mutual fund units can typically be bought and sold easily, providing investors with the flexibility to access their money when needed.
- Accessibility: Mutual funds are available for various investment amounts, making them accessible to both small and large investors.
Equity funds
Equity funds are mutual funds that invest mainly in stocks. They aim to generate higher returns by capitalizing on companies’ growth potential. However, they may have higher volatility than debt funds.
Types of equity funds
- Large-cap funds: Large-cap funds invest more than 80% of their total assets in equity shares of the top 100 companies by market capitalization. They are characterized by relatively lower volatility as they invest in blue-chip companies.
- Mid-cap funds: Mid-cap funds invest more than 65% of their total assets in equity shares of companies ranked between 101 and 250 by market capitalization. They may offer a balance between growth potential and risk.
- Small-cap funds: Small-cap funds allocate more than 65% of their total assets to equity shares of companies with a market capitalization ranking of 251 or lower.
- Large and mid-cap funds: These funds invest in both large-cap and mid-cap companies, with at least 35% of assets in large-cap and 35% in mid-cap companies. They provide a diversified approach to equity investing.
- Multi-cap funds: Multi-cap funds invest at least 75% of their total assets in equity and equity-related instruments of large-cap, mid-cap, and small-cap companies, with a minimum of 25% allocation to each category.
ETFs vs Mutual Funds
ETFs (Exchange-Traded Funds)
- Trading flexibility: ETFs can be bought and sold on stock exchanges throughout the trading day at market prices, similar to stocks, offering investors flexibility.
- Lower expense ratios: ETFs often have lower expense ratios compared to mutual funds due to their passive management approach, which can make them a more cost-efficient investment choice.
- Transparency: ETFs disclose their holdings daily, providing transparency for investors to see what they own.
- No minimum investment: ETF shares do not have minimum investment requirements, allowing investors to purchase as few or as many as they like.
Mutual funds
- Professional management: Managed by fund managers who make investment decisions on behalf of investors, mutual funds aim to achieve specific investment objectives.
- Minimum investment requirements: Mutual funds often require a minimum investment amount, which can vary depending on the fund.
- End-of-day trading: Mutual fund transactions are processed at the end of the trading day at the Net Asset Value (NAV), providing a fixed daily price.
- Active management: Many mutual funds are actively managed, with fund managers aiming to outperform the market through strategic investment decisions.
Conclusion
Understanding the differences between ETFs and mutual funds is crucial for making informed investment decisions. While mutual funds offer professional management and diversification, ETFs provide trading flexibility, lower costs, and transparency. Whether you choose ETFs or mutual funds, both can play a vital role in building a diversified and balanced investment portfolio. Investors should evaluate their financial goals, risk tolerance, and investment horizon when choosing between ETFs and mutual funds. Each investment option offers distinct advantages that may help achieve long-term financial objectives.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
