Sectors and Funds where Mutual funds diversify their investments can be represented by the following diagram.
Mutual fund companies diversify their investments in Debt Instruments, Equity Based funds, Sector Based funds, Index based funds and Government Securities.
They are detailed as follows.
Different types of Investments by Mutual Funds
1. Investment in Debt Instruments by MFs
Mutual funds invest in debt instruments of companies, which carry attractive interest rates. By this, the mutual fund ensures a reasonable return for its investors. These will improve the Net Asset value of the Mutual fund. In fact, debt instruments are more safe for investment, as they are backed by securities. For example, mortgage debentures of companies.
2. Sectoral Investment by MFs
Mutual Funds invest in different sectors of the economy. They may invest in fertilizer companies or pesticide companies in the primary sector. In the secondary sector, they may invest in power, iron & steel and cement industries by which infrastructure companies are promoted. In the services sector, hotel industry and hospitals along with banking and insurance companies’ shares are preferred.
3. Equity Based investment by MFs
Investments are made by mutual funds in equity based companies, wherein the fundamentals of the company are good. If the company has good resources with a high earning per share, naturally such companies will be regarded more attractive for investment. There are more fast moving consumer goods companies (FMCG) which have found more favor for investment.
4. Index based investments by MFs
Index based investments are those which are called heavy weightage based companies. These companies have more volume and have higher value in the stock market. Such companies decide the Index of the market. There are also Sensex companies (sensitivity based) and Nifty companies. Thus, mutual funds will prefer such companies whose Index is high and which will decide the market conditions.
5. Invest on Govt. Securities by MFs
Initially, stock markets were dealing with both company securities and government securities. But after the stock scam (Harshad Metha), the Government has delinked the treasury securities from stock market. We have now a separate market for Govt. securities. This enables mutual funds to invest there. There are also statutory obligations to invest in Govt. securities.
Investment Policy of Mutual Funds
Investment policy of mutual funds can be classified under three heads:
Low Risk Based Investments;
Balanced Investments, and;
1. Low Risk Based Investments by MFs
This consists of Government securities, Quasi government securities, company securities with guarantee in form of assets. In these investments, there will be no risk and they can be realized at any time. However, the return on these securities will be comparatively low. Mutual funds consider this investment a safer option.
2. Balanced Investments by MFs
Mutual funds invest in balanced investments for good returns. Here, the investments will be a mixture of debt instruments and equity based investments. Nearly 50% of the investments will be fully secured and will consist of mostly govt. securities. The other 50% will be equities, consisting of company’s securities which may carry risks but will provide a good return for the investment.
3. Risk-based Investments by MFs
In this category, the main objective is based on return and the companies’ securities will be the major source of investments. The return will be high and the mutual fund will be able to generate more funds with a judicious investment policy based on market experience. Mutual funds invests in risk based investments according to their customers choice.
On the basis of above classification, mutual funds will have different types of units according to the requirements of investors.