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Before going through the article below, I suggest you may go through our previous articles on: 1. Basic Types of Mutual Funds 2. Different Types of Equity Mutual Funds

Now lets see more about Debt Funds - These are mutual funds which invests in debt papers issued by Government authorities, corporate debentures, private companies, treasury bills, Commercial papers etc. Asset class varies for different types of Debt funds. These mutual funds carries very less risk compared to Equity funds. Most of the debt funds aim to generate a fixed income to the investor so they usually distribute their surplus. Assets under a debt fund are those types which pays reasonable interest on the invested capital. They focus on steady revenue as interest rather than capital gains resulting from growth of  assets. Debt instruments are considered of low risk compared to Equity Funds but there still exists risks like credit default (not paying interest in time). Different types of Debt funds arise based on difference in investment objective.

Types of Debt Funds are:

1. Capital Protection Plans:

These are a type of debt funds which guarantee investors capital. They invest a small portion of the fund in equities with a hope of generating more wealth. Main attraction of such scheme is that you need not fear loss of capital due to market downsides. You can invest in equities with out much risk and still take advantage of it.

2. Fixed Term Plans:

Fixed term plans are generally closed-end funds for short term period, say 1 year or low. Unlike normal closed-end funds these fixed term plans are usually not listed on stock exchange. They aim to generate short term returns by investing in debt instruments for short periods.

3. Gilt Funds

Gilt funds invests in Govt. debt papers, papers issued by State governments, Govt. securities, papers issued by RBI etc. These funds are considered very safe of all types of mutual funds but still it holds risk. When interest rates goes up, debt funds will loose in value, means their NAV can go down. Alternatively their NAV goes up when interest rates falls down. Gilt funds are of Short term (3 to 6 months) and long term.

4. Monthly Income Plans:

These are debt funds which aims to generate a monthly income for its investors. Risk profile is usually low to moderate. If you have a large sum of money to invest in (within the set risk profile), you can generate a reasonably good monthly return from this debt fund, if everything works in favour. These debt funds usually do not guarantee a fixed monthly income. They say they will pay dividends and distribute it if they are profitable at that particular point of time.

5. Liquid Funds (Money Market Funds):

These are the most liquid mutual funds available in market. Such funds are relatively short duration funds for 3 to 6 months. Usually they return investments at a rate of 5% (it may vary) and investments are made in safe debt instruments like Certifcate of Deposit, Certificate of Paper, Treasury bills etc. These types of investments are better than Savings Bank account which offer only 3.5% rate of return.

6.  Floating Rate Funds:

These are funds which invests in debt instruments that offer floating rate interest. They also invests in Govt.debts and securities. Returns are usually in the range of 5 to 6% for short term floating rate funds and 6 to 8% for long term floating rate funds.

7. Diversified Debt Funds:

These are type of debt funds which invests in all possible types of debt instruments and hence spread the risk to a braod level. These types of debt funds reduce risk to a low level by diverifying assets under management. Though low, these funds still holds risk.

These are the main types of debt funds available in market. If I missed any please make a comment below.

So we all know about different types of mutual funds now. If you are a new reader please go through our article on: Different types of mutual funds.

Now as we know there are 3 types of mutual funds basically viz Equity Funds, Debt Funds, and Balanced Funds. Now we are going to look in detail at various types Equity Funds available in market.

Be aware that Equity funds are the riskiest of all 3 basic mutual fund categories because they invest directly in stocks. The assets under an equity fund comprises of equity from all sections Small cap, Mid Cap, Large Cap and Giant companies.

Types of Equity Funds:

1. Growth Funds:

These funds invest in stocks of fast growing companies and in stocks that has a growth potential in long term. Most of the assets under this fund might be Large cap companies and the rest of the assets might be Mid cap funds. The objective of this fund is to produce long term capital gains for the investor rather than periodical income from dividends and capital gain distribution. Growth funds are expected to produce a sizeable return in a span of 4 to 5 years. Since they offer higher returns investing in a Growth fund is risky.

2. Aggressive Growth Fund

This fund is considered the most risky mutual fund among all types of funds. Main objective of this fund is to give the investor maximum returns and gains by investing in Mid cap and other under researched stocks which are expected to perform outstandingly in future, say 3 or 5 years time. Most of the stocks selected under this fund are based on mere “expectation” rather than based on solid researched data. Hence this fund is highly volatile and carries a high risk. Well if things work out in favour of the fund, you can expect a very high return.

3.  Income Equity Fund (Dividend Yield Equity Funds):

As the name suggests main objective of the fund is to provide investors a steady income (periodical, may be every month or quarter) from the assets under the fund. Assets under this fund are usually of large corporations which provide higher dividends consistently. Investments under this fund carries a less risk compared to the above 2 funds. This is because not much speculative stock pickings are done under this fund which aims high capital gain. Most stocks under this fund belong to established corporations which provide high dividends consistently. In addition to steady income through dividends and capital gains distribution, this fund also grows in value in long term.

4. Value Fund:

These funds invests in assets that are under valued. Fund manager usually selects stocks that have low Price to Earnings ratio, low Market to Book Value ratio etc. In simple terms a value fund aims to invest in stocks that are not currently recogonised by market forces. Such stocks are traded at a low price in market than their real value. In long term these stocks are expected to rise up to their real value and produce very good capital gains.

5. Diversified Equity Funds:

This fund is a kind of risk mitigated fund because of diversification. This type of funds well manage the risk associated with equity investments. They do so by diverifying the asset portfolio under the fund. Such funds invest in almost all business sectors like banking, ifrastructure,hospitality,IT etc etc. They also invest in all types of companies ranging from Small to Large cap. They dont produce very high returns like a Growth fund but still they produce very attractive returns if everything works in funds favour. Risk still exists because major portion of the fund is invested in equities. Tax saving equity funds are diversified type and they are explained below.

6. Tax Savings Equity Fund:

These are investments whose main objective is tax savings for the investor. Investments upto 1 Lakh rupees are exempted from tax. ELSS (Equity Linked Savings Scheme) is one main and popular type of tax savings fund. Such funds have a lock-in period (as defined by fund company) and if the investor redeems the fund before lock-in period he will not get the tax exemption. (He must repay the tax exemption he got when he purchased the fund). Tax savings funds are well diversified and its mandatory that a tax saving fund must invest in 90% of available equity options at the time. This manages risk part well and keep in mind its still rsiky

7. Equity Index Funds:

These are funds which works based on an Index value say NIFTY50 or SENSEX or NASDAQ or S&P500 etc. Assets under this fund comprises of same stocks under the index. If the funds objective is to replicate Nifty then it will have all the stocks under Nifty as its assets. In order to know the risk portion, a fund that follows an index with more number stocks under it is comparitively risk free than a fund which follow an index with low number of stocks. Ex: A fund that follow S&P500 is more risk free than a fund that follow Nifty50.

8. Special Type of Equity Funds:

Such funds have a special objective to meet and their investment strategy and assets under the fund will reflect that particular objective. It can be to invest in a particular sector of stocks/particular type of companies etc. They follow a concentrated investment strategy which is comparitively riskier than a diversified equity fund.

a. Sector Funds – Assets under this fund belong to a particular sector of the business industry, say Banking stocks alone or IT stocks alone or Infrastructure stocks alone etc. Such funds will invest only in that particular sector based on their objective. These funds carries high risk profile.

b. Mid Cap/Small Cap Funds - As the name suggests, assets under this fund belong to either Mid cap or Small cap or both as described by the funds investment objective.

c. International Equity Funds - These funds invest in stocks of international companies alone. Risk profile is high as this is a concentrated fund.

d. Option Income Funds – One objective of the fund is to provide periodical income to the investor by investing in stocks of companies that provide very dividends. In addition they try to maximise the income by taking advantage of Call Options on the stocks they hold.

e. Precious Metal Funds – These funds invests in precious metals like Gold and mining companies involved in mining precious metals.

We have covered almost all types of Equity mutual funds. Still due to accidental error or lack of knowledge I might have missed some, please comment if you find any. Also share your opinion about this article.

Every day you see newspaper and the websites you routinely visit filled with advertisements from mutual funds. You see a ‘n’ number of ads from ‘n’ number of companies. How to select an ideal mutual fund for you from these 1000′s of available funds ? That’s what we are going to explore in this article. After reading this article you will be well informed so that you can easily select the best fund that suits your financial goals.

First of all, if you dont have any idea about the different types of mutual funds available in market – please read our article first – Different Types of Mutual Funds

Now that you have read the above article, you will have an idea about, What is an Equity Fund, What is a Debt Fund, What is Balanced Fund etc. Now lets go through the process of selecting your mutual fund.

1. Knowing your financial goals:

This is the primary step in selection of a fund.

a. Higher returns, Growth of Capital but with higher risk:

If you are looking for higher returns for your investment and if you are ready to invest your money in long term, I think the best option out there is an Equity Fund. Now be aware that Equity funds holds very high risk of investment. An equity fund is directly linked to stock market and the ups and downs of market will be reflected in its Net Asset Value. Volatility is high for this investment. If you fear loosing your invested capital or if you are not ready to invest in long term say 4 or 5 years (do not invest in equity funds if you want to withdraw cash by selling funds within 1 or 2 years), then you must avoid equity funds. Otherwise Equity funds offer the best returns (as recorded so far) in long term if everything works out in its favour.

b. Steady flow of Income periodically, Low growth of Capital but very low Risk:

If you are looking for a steady flow of cash/income from your investment without much risk of investment, you can choose Debt Funds. Debt funds always invests in comparitively safer Govt.bonds, securities, corporate debentures etc. Capital gain or growth of capital will not be that high here (compared to Equity fund) but the interest provided by the assets these Debt funds invest in enables you for a steady periodical income from your investment. You can collect these income monthly or quarterly. Debt funds are highly liquid, you can convert it to cash any time. So if you need to preserve the liquidity of your funds so as to withdraw/sell funds any time, Debt funds are the best option.

Steady flow of Income periodically + Growth of Capital + Medium risk

If you want a mix of both, say a kind of safety for a part of your investment and growth of capital for other part, Balanced/Hybrid funds is your best choice. Balanced funds invests a part of the total fund in Equity (Stock market) and another part in Debt instruments (corporate debentures,govt.bonds etc). This ensures safety for a part of your investment while it also ensures attractive gains by investing in Equity.  Balanced funds carry more risk than Debt funds.

2. Analysing Fund Performance:

First thing I want to make clear is past performance of a fund does not mean it will perform same way in future. A fund which shows consistent improvement (and very good performance) for last 3 years may end up in loss in coming year. Similary a fund which was in loss last year may perform magic and produce extra gains next year. It all depends on the assets managed under the mutual fund. It is highly dependant on what equities they buy and sell, timing of trade, market sentiments etc. By analysing past fund performance you will get an idea on whether you need to be skeptical or not? say when you see a consistently high performing fund, you can develop a positive approach towards it, research more deeper into it and if found good you can invest. On the other hand a fund with bad performance can be viewed with skepticism, you can do a thorough research and if you still see a potential in that fund you can invest (even funds with very sound assets under management will under perform during bear markets), else avoid.

3. Fees and Charges by the Mutual fund company:

Though it may sound very low in percentage say 1.5% or 1% , even that minor difference can have a very high impact on your returns. Lets see this through an example, suppose you invested Rs.10,000 in a fund that produces 10% annual return. If the company charges 1.5% as its operating expense every year, then after 20 years your investment would have grown to Rs.49,725. Now if the company charges only 0.5% as operating expense instead of 1.5% then your investment would have become Rs.60,858. So that gives you a good idea on how to be careful in selecting a mutual fund with low fees and expense charges.

4. Age and Size of the fund:

There are mutual funds which are more than 10 years of age available in the market. Such funds can be analysed for its past performance through the ups and downs of market. A problem with such funds may be the big asset size they hold. They always find difficulty in investing the newly generated cash because it’s not that easy to find a good stock. More over such big asset size will be over diversified. Well these are two critical factors you must consider while selecting your mutual fund. Now the problem with comparitively younger funds are their long term performance can not be predicted. Though they may perform well in short term, they might not continue that performance in future.

5. Credibility, Track record, Experience of the Fund company:

This is another factor you should focus on. Always go for well established, consistently performing mutual fund companies who value their customers. You can always get these data from internet review websites.

6. Fund Manager:

Every fund has a manager who picks stocks for the fund. If possible check the fund managers track record and background. Also for very aged funds (even for young funds), check whether there is any change in fund manager. If the funds better performance was under its previous manager, there is no guarantee that fund will perform same way under its new manager.

7. Portfolio Turn Over rate:

This shows the frequency at which the fund manager buys and sells stocks for the fund. If this frequency/rate is high it means you will incur additional charges under transaction costs and taxes.

8. Taxes to be paid:

Capital gains of a fund obtained by selling a stock in profit usually gets redistributed among share holders. This is taxable. Long term capital gains usually get tax exemption. If the mutual fund aims at short term gains then that gains are taxable. You should check with fund information to know more about this. Always look for saving taxes.

I guess I covered many important criteria to be considered while selecting a Mutual fund. If I missed something please post a comment, I will cover that too.

SBI recently introduced daily dividend option under its SBI Magnum Instacash Liquid Floater plan with effect from 22 November 2010. Dividend declared will compulsorily be reinvested and the dividend will depend on the availability of redistributable surplus.

Let’s take a more close look at SBI Magnum Instacash Fund:

Objective of Fund:

This is an open end liquid fund which focuses on providing investors with higher returns by investing in debt instruments and money market securities. This fund is highly liquid and can be converted to cash by selling any time.

More Details about the Fund:

Date of Inception - January-5-1999

Fund Category : Debt – Income Fund

Assets Under: This fund invests in Debt instruments (Corporate debentures, PSU/FI/Govt guranteed bonds), Govt.Securities, Money market instruments (like Commercial paper, Treasury bills, Certificate of Deposits, bills rediscounting, short term bank deposists, repos etc.).

NAV - 16.50 (as of 07-Dec-2010)

Total Assets: Rs.81.56 Crore as of October-29-2010

Dividend: 0.10 % as of 03-Dec-2010

Note: Entry and Exit loads of this mutual fund is Nil. There is no SIP (Systematic Investment) option available to this scheme.

Minimum Investment – is Rs.10000 and there is no limit to maximum investment as this is an Open end fund. Further investments above Rs.10000 must be made in multiples of Rs.500.

SWP - A Systematic Withdrawal Plan is available to this fund in which a minimum of Rs.500 can be withdrawn every month or quarter.

Another advantage is Switch over facility to other funds. If you wish to drop this fund and switch to other funds of SBI, you can do so at the current NAV of other funds ike SBI Magnum Balanced Fund, Magnum multiplier funds etc. You have to check with SBI Mutual Funds division or any SBI bank branch to know more details about this.

Two types of plans are available under the Instacash fund – Plan A and Plan B. Plan A- is a Dividend pland while Plan B is a cash plan.

Share your views about SBI Magnum Instacash fund as comments.

Note: Read our article on Mutual Funds – Introduction to Basics before going through this article.

Now that we have seen basics of a mutual fund, it’s advantages and disadvantages, now lets take a look at different types of Mutual funds.There are large number of varied mutual funds available in market created by different companies. There are funds which holds very high risk (offering higher returns if everything works in favour) to funds which holds low risk of loss. Every mutual fund has a financial objective according to which the fund manager selects various stocks to buy, defined strategies etc. Asset class under various mutual funds depends on that funds financial objective.

Basic types of mutual funds are:

1. Equity Funds

Equity mutual funds (Stock based schemes) invest a major portion of their total fund in equities. Which stocks, which industry, which business etc is decided by the fund manager. Usually you can get this data from the mutual fund investment policy or by asking the official of mutual fund providing company. Equity funds offer higher returns in long term but they fall under high risk category. If the market goes down your mutual fund will also loose in value and make loss.

Equity Funds are further divided into:

a. Diversified equity funds - in which the stocks picked by fund manager is diversified in terms of company, industry etc. In such a fund risk is distributed, means it carries less risk compared to other.

b. Equity Linked Savigs Scheme (Tax saver plan) - This is a Tax saving mutual fund. This means a portion of your income invested in an ELSS is tax free according to Income tax act – 80C. Investments upto Rs.1Lakh is tax free in India. Asset class under this fund is mainly equities so it carries risk unlike other tax saving schemes like National Security Certificate (NSC) or Public provident funds (PPF).

c. Mid Cap funds - These are mutual funds which invests in small and medium companies. Each mutual funds has its own classification criteria to distinguish small,medium and large companies. Mid cap funds are supposed to perform well and create wealth in long term based on assumption that many mid cap companies has potential to become large cap in future. These funds also carries high risk.

d. Sector Funds - These are mutual funds which invests in a particular sector of stock market or economy say FMCG alone or Banking sector alone or Infrastructure, Real estate etc. These funds carry very high risk and are more volatile. They can produce very high gains or loss depending on performance of that particular sector.

e. Index Funds – These are mutual funds which invests based on a passive investing strategy called Indexing. They aim to track and replicate an index say the Nifty 50 of India or the S&P 500 of America etc. It differs from fund to fund.

2. Debt Funds

These are mutual funds which invests in debt papers issued by Government authorities, corporate debentures, private companies, treasury bills etc. It varies for various types of Debt funds. These mutual funds carries very less risk compared to Equity funds.

Debt funds are further divided into:

a. Income Funds - Invests a major portion of the corpus (total fund) in Govt.securities, corporate debentures, and bonds.  These funds focus primarily on current income – a steady flow of cash as income on a monthly basis or quarterly basis. This fund carries less risk becuase they dont usually invest in volatile growth equities (varies for different mutual funds).

b. Gilt Funds – These mutual fund schemes invests in debt papers backed by Govt.of India. These are the safest mutual fund investments available as it carries zero default risk. You need not worry about loss of capital but interest rate may fluctuate.

c.  Monthly Income Plans (MIP) - These are similar to Income Funds and invests a major portion of their corpus in Govt.bonds,corporate debentures etc. A small portion of the fund gets invested in equities to take advantage of the growth equities. Therefore it carries more risk compared to other debt funds.

d. Short Term Plans - These are funds meant for short span of say 3 to 6 months. They invests mainly in Certificate Deposists and Certificate Papers.

e. Liquid funds (Money Market Funds) – is another safe mutual fund for short term investment say to 3 months. They invests in Certificate deposits, Certificate Papers, Treasury bills etc. Name comes from its easy liquidilty – it can be converted to cash any time.

3. Balanced Funds (Hybrid Funds)

These mutual funds invests in both Debt papers and Equities there by aims to combine best of both worlds. This mutual funds offer growth in capital from equities and offer a stable periodical income from debt funds. Risk is less compared to Equity funds but more when compared to Debt funds, well it mixes both.

Above 3 are basic classification of mutual funds. They can be further classified on various objectives, which are given below. You can follow each link to get more insight and knowledge before you invest in a Mutual fund.