Explain mutual fund and its types in detail

Answer:

Mutual Fund:

A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for investing in securities such as stocks, bonds, money market instruments and similar assets.

Types of Mutual Funds:

            There are four primary types of mutual funds are available for investors, which are following.

1.      Equity Funds:

A stock fund or equity fund is a fund that invests in stocks, also called equity securities. Stock funds can be contrasted with bond funds and money funds. Fund assets are typically mainly in stock, with some amount of cash, which is generally quite small, as opposed to bonds, notes, or other securities.

General equity funds include:

Ø  Aggressive growth funds, which seek maximum capital appreciation and may use speculative strategies.

Ø  Small-company funds, which invest in companies with relatively small market capitalizations.

Ø  Growth funds, which invest in larger, established but growing companies. They generally emphasize capital appreciation.

Ø  Growth and income funds, which invest in larger, established companies that offer the potential for capital appreciation but also pay regular dividends.

Ø  Equity-income funds, which primarily invest in dividend-paying stocks.

2.      Bond Funds:

A bond fund or debt fund is a fund that invests in bonds, or other debt securities. Bond funds can be contrasted with stock funds and money funds. Bond funds typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation.

Types of Bond Funds:

There are three basic types of bond funds, which are following;

(i)                 Government Bonds:

Government bonds funds invest in debt securities that are issued by the Pakistan government and its agencies. These funds are regarded as the safest of the bond funds because the underlying securities are backed by the full faith and credit of the Pakistan government.

(ii)                    Municipals Bonds:

Municipal bond funds invest in debt securities issued by state and local governments to pay for local public projects, such as bridges, schools, and highways. These bond funds are popular among investors with high incomes because they are exempt from federal taxes and, in some cases, from state taxes as well.

(iii)               Corporate Bonds:

Corporate bond funds are comprised of bonds issued by corporations. Any government institution does not back the bonds in a corporate bond fund. Thus, it is more likely that the underlying bonds could default if the companies that issue them run into financial trouble.

(iv)                Other Bonds:

There are many other types of bond funds. Zero-coupon bond funds invest in zero coupon bonds; international bond funds invest in bonds issued by foreign governments and corporations; convertible securities funds invest in bonds that may be converted into stock. Finally, if you are looking to diversify your holdings even more, there are multi-sector bond funds that invest in all different types of bonds: corporate bonds, municipal bonds, international bonds and so on.

3.      Hybrid Funds:

A hybrid fund is a category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed. Morningstar separates hybrid funds into domestic hybrid and international hybrid categories.

4.      Money Market Funds:

A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely (though not necessarily accurately) regarded as being as safe as bank deposits yet providing a higher yield.