Available Options in Mutual Fund
Dividend Option
The fund normally earns income from the profit which it makes by investing in securities. It also earns dividends on those securities. The investors are normally given the option of making some of the earnings through dividends by Mutual Fund companies.
Growth Option
As said earlier, a fund earns income from the profit it makes by investing in securities and also in the form of dividends. In growth option, the investors leave the earned profits in the mutual fund and allow it to get invested for earning more returns. A diversified portfolio of stocks normally has capital appreciation as its primary goal. They invest in companies that reinvest their earnings into expansion, acquisitions, and research and development. Investors generally get higher potential growth in these types of funds but there is usually higher risk associated with them too.
Equity Fund
It is a mutual fund that invests in a broad based and well-diversified group of stocks. The invested funds will either be in cash or stock. Mostly an equity fund invests its assets in stocks of companies and earns returns in the form of capital gains (the difference between buying and selling stocks) as well as dividends earned from these investments. This type of fund is riskier than balanced funds and debt funds.
Debt Fund / Income fund
It is also called bond fund as this fund normally invests in mainly government securities and corporate bonds which bear interest. It may invest in short-term or long-term bonds and other securitized Products, money market instruments or floating rate debt. It earns returns from interest income on its investments and profits on trading securities. This fund is the least risky of all the funds. In other words, the main investing objectives of a debt fund will usually be preservation of capital and generation of income.
Hybrid Funds
This fund type invests in equity shares of companies as well as debt securities. It earns income in the form of dividends and interest as well as buying and selling securities. This is riskier than debt fund and less risky than equity funds.
Some of distinctive characteristics of
mutual funds include the following :
- Investors purchase mutual fund shares from the fund itself (or through a broker) instead of purchasing them from other investors in a secondary market (in Stock Exchange).
- The mutual funds shares are purchased at per share net asset value(NAV) of the fund. Apart from that price an investor may have to pay any fees that the fund imposes at the time of purchase in the form of specified entry loads.
- Mutual fund shares are “redeemable,” which means one can sell one’s shares back to the fund or to a broker for the fund.
- Mostly Mutual funds are constantly creating and selling new shares to attract and accommodate new investors.
Pros and Cons
Advantages
Every investment has advantages an disadvantages. But what is important to remember is that as the choices and preferences of each investors vary, the advantage of a particular feature for him will depend on his unique circumstances. Generally, mutual funds provide quite an attractive investment choice for investors because they generally offer the following features viz. Professional Management, Diversification which mean spreading your investments across a wide range of companies and industry sectors. Affordability in the sense that one can enter in mutual funds even with relatively less invest able amounts. Liquidity by way ready availability or redemption of you shares at the extant NAV at any point of time.
Disadvantages
But mutual funds also have features that some investors might view as disadvantages, such as costs, as investors pay sales charges, annual fees, and other ancillary charges irrespective of the fund’s performance, even if it gives negative returns, lack of control, as investors can neither determine the composition of a fund’s portfolio nor can they directly influence the buying behavior of the fund manager, price uncertainty as unlike with an individual stocks, with a mutual fund, the purchase price or redemption price of the shares will depend on the fund’s NAV.