Question

Discuss the different types of mutual funds offered by financial institutions, and the types of investors they attract based on investment risks. What are some inherent risks and opportunities mutual funds face?

Answer 1

Mutual Funds are those fund that pools the money from many investors and invest that money in securities such as bonds, shares etc.

Different types of mutual funds are as follow:

• Target Data Fund-These fund also known as life cycle funds which are designed for individuals after keeping there retirement in mind.These funds are mix and match of bonds , stock and other investment.
• Bonds Fund- These funds are generally highly risky funds as it aims to produce high returns.As there are many different types of bond fund so there risk and reward also vary.
• Money Market Funds: These funds are less risky then bonds fund. As per law they can invest only in short term investments such as local government investment or state government investment.
• Stock Funds:These funds basically invest in corporate stocks. Depending on investors expectation they may be classified as income funds(which is for short run only to earn profit due to change in price), growth fund(return is in the form of dividend) etc

As there is no minimum cap to invest in mutual fund so any one can invest in mutual funds. From a common man to institutional investor any one can invest in mutual funds according to there budget. People invest in mutual fund because they are affordable, diversified, managed by professionals and highly liquidable.

There are some inherent risk and opportunities that mutual face as every one knew that a firm past performance is not as important as we think because past performance doesn't predict future returns.

It only predict volatility of fund over a period of time. If the fund is highly volatile the risk involved is high also the returns eill also high but its just prediction

With mutual fund one can loose all his money or some of his money or can earn huge profit if all prediction goes well.

Dividend and interest condition also changes with change in market

From Mutual fund one can earn 3 things

1. Increase in NPV: That will come subtracting the opening NAV from closing NAV
2. Capital gain distribution: This will come when you sell your mutual funds
3. Dividend or Interest payment