Sunday, November 05, 2006

Portfolio Classification…

Passing through the portals of Portfolio Classification…

Equity/Growth Funds

Equity/Growth Funds normally invest a majority of their corpus in equities. They provide capital appreciation over the medium to long term. They have comparatively high risks.

Blue chip funds invest in stocks of very well respected companies. The purpose is to build a stock portfolio of conservative stocks so that it does not do worse than the stock market indices. Such funds return less than funds that invest in growth oriented companies.

Debt/Income Funds

Debt/Income Funds invest in fixed income assets such as corporate debentures, government securities, bonds and other debt related instruments .They provide capital stability and regular income to the investors. Such funds are less risky compared to equity funds. However, opportunities of capital appreciation are also limited . The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa.

Floating-Rate Debt Fund comprises of bonds for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.

Monthly Income Plan aims at providing regular income (not necessarily monthly, don't get misled by the name) to the unitholder, usually by way of dividend, with investments predominantly in debt securities (upto 95%) of corporates and the government, to ensure regularity of returns, and having a smaller component of equity investments (5% to 15%) to ensure higher return.

Marginal Equity Funds are funds which have investment of atleast 75% in debt instruments & the balance in equities. These funds offer the security of debt with the flavour of equities.

Balanced Funds

Also known as Hybrid Funds, Balanced Funds invest in a mix of equity and debt (a minimum of 65 percent in equity is mandatory). Hence, they are less risky than equity funds, but at the same time provide commensurately lower returns. Balanced funds are ideal for diversifying investments without spending time on the process. NAVs of such funds are likely to be less volatile compared to pure equity funds.

A similar type of fund is known as an Asset Allocation Fund. The objectives are similar to those of a Balanced Fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is given freedom to switch the ratio of asset classes as the economy moves through the business cycles.
Money Market Mutual Funds

A Money Market Fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. It is also known as Liquid Fund. It invests only in safe short term instruments such as T-Bills, Certificate of deposits (CDs), Corporate Commercial Papers, and inter-bank call money market. The investment will remain intact because this is the overriding concern the fund has and it sacrifices greater returns by picking absolutely safe short term investments.

Gilt Funds

Gilt Funds invest in Government of India and State Government securities and bonds that are guaranteed by the Central and State Governments. These mutual funds are the safest type of debt funds available since they invest in bonds backed by the full faith of the government. The original investment is as safe as it can be though the returns may be lower than what you can get in a debt mutual fund that invests in corporate debt.

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