My previous column was based on the different types of mutual funds people can invest in, following through with the same, todays column focuses on specialised mutual funds.
Classification based on specialisation
. Sector Funds: Sectoral Mutual Fund schemes invest in instruments of a particular sector such as pharmaceutical, infrastructure, information technology (IT), and others. Sector funds may also invest in companies with small, medium, or large market capitalization. As these funds invest only in specific sectors with only a few stocks, the risk factor is on the higher side. Investors are advised to keep track of the various sector-related trends. Sector funds also deliver great returns. Some areas of Banking, IT and Pharma have witnessed huge and consistent growth in the recent past and are predicted to be promising in future as well.The risk involved is closely tied to the sector risks.
. Index Funds: Suited best for passive investors, index funds put money in an index. A fund manager does not manage it. An index fund identifies stocks and their corresponding ratio in the market index and put the money in similar proportion in similar stocks. Even if they cannot outdo the market (which is the reason why they are not popular in India), they play it safe by mimicking the index performance.
. Fund of Funds: A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ also known as multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse fund categories. In short, buying one fund that invests in many funds rather than investing in several achieves diversification while keeping the cost down at the same time.
. Emerging market Funds: To invest in developing markets is considered a risky bet, and it has undergone negative returns too. India is a dynamic and emerging market where investors earn high returns from the domestic stock market. Like all markets, they are also prone to market fluctuations. Also, from a longer-term perspective, emerging economies are expected to contribute to most of the global growth in the following decades.
. International/ Foreign Funds: Favoured by investors looking to spread their investment to other countries, foreign mutual funds can get investors good returns even when the Indian Stock Markets perform well. An investor can employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a feeder approach (getting local funds to place them in foreign stocks) or a theme-based allocation (eg, gold mining).
. Real Estate Funds: Despite the real estate boom in India, many investors are still hesitant to invest in such projects due to its multiple risks. Real estate fund can be a perfect alternative as the investor will be an indirect participant by putting their money in established real estate companies/trusts rather than projects. A long-term investment negates risks and legal hassles when it comes to purchasing a property as well as provide liquidity to some extent.
. Commodity-focused Stock Funds: These funds are ideal for investors with sufficient risk-appetite and looking to diversify their portfolio. Commodity-focused stock funds give a chance to dabble in multiple and diverse trades. Returns, however, may not be periodic and are either based on the performance of the stock company or the commodity itself. Gold is the only commodity in which mutual funds can invest directly in India. The rest purchase fund units or shares from commodity businesses.
.Exchange-traded Funds: It belongs to the index funds family and is bought and sold on exchanges. Exchange-traded Funds have unlocked a new world of investment prospects, enabling investors to gain extensive exposure to stock markets abroad as well as specialised sectors. An ETF is like a mutual fund that can be traded in real-time at a price that may rise or fall many times in a day.
. Gilt Funds: These funds invest only in government securities. They are preferred by investors who are risk averse and want no credit risk associated with their investment. However, they are subject to high interest rate risk.
Mutual funds offer peculiar diversification in investments through the distinctive schemes and products which are designed to suit people with diverse investment styles. Understanding which type of mutual fund scheme meets one’s requirement is the key to achieving the desired objective. Everything in your life is a reflection of the choice you have made. If you want a different result, make a different choice.
