Mutual Fund invests against the current market trends and buys those stocks which are not performing well at present.
The assumption is that any excessive price of an asset will eventually return to normal over the long term. Hence it is not the right choice for investors with weak will power
While it is important to be aware of the factors that you should keep in mind while choosing a mutual fund to invest, it is important to understand the importance of choosing the right type of fund to invest your money. Equally important, so that you can end up with higher returns with a better investment plan. Till 2018, funds had the freedom to invest in any category in terms of opportunities and this made it difficult for investors to evaluate mutual fund schemes.
To overcome this problem, the Securities and Exchange Board of India (SEBI) set up the Mutual Fund Advisory Committee to issue a scheme for classification of mutual funds. The committee classified the schemes into five categories, which include equity, debt, hybrid, solution oriented and others.
It is important to know that we are covering most of the types of Equity Mutual Funds and each fund accepts different levels of risk as these funds invest in stocks and shares of companies in the stock market and the returns that can be generated from this are: Depends on how these stocks perform. Companies in which investments are made on behalf of Mutual Funds are classified by SEBI as per their market capitalization (value of the company’s shares in the market) as large-cap (high market value), mid-cap and small-cap (low market value). ) is classified as
Thereafter, mutual funds are classified into different categories on the basis of how much of the capital they invest in a select class of companies or what is their investment behaviour. If you are looking for investment opportunities, you should keep in mind these diverse classifications of equity mutual funds:
1. Large Cap Mutual Funds
Equity funds invest a major part of their assets in companies or institutions with large market capitalization. Large capitalization here means that these companies have wide market share and have a long and strong track record of wealth creation for investors. These are low risk schemes and are the best option for investors who want to make safe investments while avoiding risk. This option proves to be safer as the large companies usually take the volatility and downturns in the market.
2. Mid Cap Mutual Funds
We have seen how market capitalization can affect returns. Mid-cap funds generally target companies to invest in which are generally present between 101 to 250 in market capitalization. This means that these companies are relatively more volatile than large-cap companies but more stable than small-cap companies. These schemes are a better option for investors who are willing to take more risk in order to earn above average returns.
3. Small Cap Funds
These funds invest at least 80% of their capital in small-cap companies. In terms of market capitalization, small-cap companies are ranked above 250. The SEBI ranking of a company can be understood as the ranking coming in competitive examinations. The higher the rank, the higher the risk. Even slight fluctuations in the market can affect the capital invested surprisingly. Hence, these schemes are suitable for investors who can take more risk in search of higher returns and who expect higher growth. Despite all this, we believe that this is a very risky investment option and should be adopted only under the supervision of a financial advisor.
4. Multi-Cap Funds
These schemes are a mix of investments in large, mid and small cap companies, where the capital is divided to invest in each type of company. It is one of the best options for risk-averse individuals who want to diversify their investment portfolio along with earning money. (New investors should definitely aim for this).
5. Equity Linked Savings Scheme Funds
ELSS funds are the most sought-after mutual funds as they come under the tax exemption of Rs 1.5 lakh under Section 80C. The actual earning from these funds is Long Term Capital Gains with a lock-in period of three years, which is taxed at 10% and there is also a provision for tax exemption on gains up to Rs 1 lakh. These schemes are incredibly attractive for tax benefits and also useful for long term financial planning.
6. Dividend Yield Funds
Dividend (money given by companies to shareholders out of their profits) is one of the most attractive and useful features of investing in equity. The companies in which these funds are invested are known to pay high dividends as they generate good profits and have a good track record in terms of wealth creation. These funds are best suited for investors who want good returns along with willingness to invest in reputed companies and where the only motivating factor is the value of dividends.
7. Sector Funds
These schemes are sector-specific, meaning that the capital will be invested in a specific segment or industry of different market capitalization or class of securities involved, such as real estate, natural resources, technology, etc. These schemes are best for investors who want a diversified portfolio with presence of a single sector or segment.
8. Contra Funds
Contra Mutual Fund invests against the current market trends and buys stocks that are currently not performing well. The fund manager has a conflicting view of the stock. In clear words, when investors are leaving or buying a stock, in such a situation, this fund takes a reverse stance. Both over-performance and under-performance situations distort the value of the asset and the same position is redeemed by this fund. The assumption is that any excessive price of an asset will eventually return to normal over the long term. Hence it is not the right option for investors with weak will power.
9. Value Funds
Many seasoned investors commit to a combination of growth and value investing as a way to build wealth. However, finding the right stocks and buying them at the right time requires a lot of effort and awareness about the market. Such funds calculate the intrinsic value of a company on the basis of financials, business model, competitive position, management etc. If the market value of the company is less than its intrinsic value, it is considered to be ‘worth’ (worth investing in). These funds are a good choice for investors who have prior knowledge and understanding of the market, but are not ideal for new investors.
10. Focus Funds
Focus funds are a category of mutual funds that invest in a small number of diversified (maximum 30) stocks. With this investment plan, the focus is on limited variation from very few sectors, rather than a diverse range of stocks with varying market capitalisations. The strategy of this type of fund is primarily aimed at maximizing returns by investing in extremely high performing assets.
Each of the above classifications serves a certain purpose of investment, but they do not necessarily have to be adjusted according to your interests. So make sure you do your own research while choosing a mutual fund to invest in to ensure that it gives the kind of return you want based on your budget and as part of your long-term financial plans. Will be able We strongly recommend that you consult a financial advisor before investing.
(The author is the CEO and co-founder of ZestMoney.)
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