MUTUAL FUNDS (Types of Mutual Fund) PART-II
So we are again here with a little more discussion on Mutual Funds. In the previous blog of Vyolve Paisa, we discussed about the basics of mutual funds, how mutual funds and the stock market is related to each other, and what is the process involved while starting an AMC. So in this blog, we will go a level ahead of the basics and we will discuss the types of Mutual Funds, and as a beginner which mutual fund you should choose as a part of your investment.
So without wasting much of our time, let’s get started!
So we already discussed what happens in Mutual Funds that, we invest our money through a Fund Manager who invests our money in the stock market on behalf of us. Now the Fund manager maintains a portfolio, which would also contain shares, now it is not like you can invest in any of the shares, it requires a criterion about the types of investment you are going to choose. We can categorize Mutual Funds into four types on the basis of the company- large-cap, mid-cap, small-cap and multi-cap.
Now let us arrange all the companies in India in descending order, that is the top companies at the above, the large-cap invests in the top 100 companies and in mid-cap mutual funds, the fund manager will invest in the companies starting from 101–250 in the order. And the small-cap companies will invest in the companies after 251 in the order of the sorting.
So in large-cap, there are top companies, then there are average chances of profits and losses, which means that you are going to get an average return, and the chances of loss will be certainly less. Now in small-cap what happens, the companies in which the fund manager invests are companies which lie after 251 in the order, which are small companies like Penny Stocks, Multibagger stock, so when you invest in such stocks, the returns can be high and on the other hand, your money can also sink, so as a beginner, you should not invest in small-cap because if you invested in small-cap and it gave ample returns, then well and good and if not then your entire trust on the mutual fund will go in vain and you would start to think that Mutual Funds are not good for investment.
Now next comes, the multi-cap. Multi-cap is a kind of mixture of all the three caps, like some portion of large-cap, some parts of mid-cap and some from the small-cap. So in multi-cap, they keep the proportion in such a way that the earnings are certainly more like they would be keeping much proportion of large-cap. So a beginner would invest in either large-cap or multi-cap. Now, this was the company-wise categorization of Mutual Funds.
Now, through whom are you going to buy the mutual fund is also important. Now there are plans, the Regular Plan and Direct Plan. Regular plan means when you are investing through a broker, or the broker advised you to invest in the particular stock, then the brokerage charge will be there which will be incurred by the investors(i.e you). But in the direct plan, you will do the market study and do your investment yourself(i.e by using a platform through which you can invest in mutual funds), then you will not have to pay the brokerage charges and the interest will be higher, so direct plans work much better. And mostly at this point of time, we should invest in Direct Plan because the broker will not be telling us anything and it will be based on our research and understanding.
Next comes, Dividend, so when you invest in a company, the company gives us dividend on the invested stocks and shares, which we discussed in corporate actions. So another type of Mutual Fund is Dividend Pay-out, in which when you are getting divided, you are having an option either to withdraw the dividend or to re-invest the dividend again in the form of the purchase of other shares. The other one is Dividend Re-investment, in which you do not get the dividend, rather the AMC will invest it again, on behalf of you.
The best one is Growth, in Growth types, the compounding effect will be in effect. Say when you get the dividend, the fund manager will invest all the profits(dividend money) into the investment again, and as time passes the overall returns gets compounded and as a result, you will get more returns.
Okay, so let me draw the conclusion out of it, so as a beginner, you have to look after the large-cap, multi-cap, learn about the Direct plan and the growth types of investment. Now you must be wondering about how one will find out this info about the mutual funds, so when you look about the company or mutual funds, then when you will read the name, you will understand it quite well. And it is not like if it’s large-cap, then the whole investment is in large-cap, fund manager often invests some percentage of the total investment amount in small-cap, mid-cap or multi-cap.
So that’s all from Vyolve Paisa for today, let’s see what new info we bring in our next blogs, till then keep learning and keep exploring and continue to Evolve with Vyolve.
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