Mutual Funds - Capitalizing on Real Estate Potential

The real estate stocks are difficult for an average retail investor to read. Wild swings have been the order of the day. However, mutual funds that have 3-4 per cent investments in real estate stocks allow a small investor to benefit from the surges but remain protected from the troughs.

Making an informed decision is necessary for the success of your investment goals. Mutual Funds (MFs) are certainly among the most sought-after investment instruments in the market but since you have to select from dozens of mutual funds and not all funds perform well, here we demystify the world of mutual fund investing for you.

What are MFs?

MFs are the professionally managed funds that invest in the equities of various companies, including real estate, listed on the Indian stock markets. These funds are governed by the Securities and Exchange Board of India (SEBI) that safeguards rights and interests of retail investors. Any citizen of India can buy mutual fund units that are available at certain Net Asset Value (NAV) declared every day by the fund managing company.

Should you invest in MFs?

As an investor you could well think of investing in the stocks of real estate companies directly. However, in order to make successful investment, you must take a look at the kind of volatility realty stocks witness on the stock exchanges. The Realty Index clocked whopping returns of 48 per cent between Feb 7, 2007 and Feb 7, 2008, on Bombay Stock Exchange (BSE) but it's not that every investor who pumped in his money in realty companies directly into stock markets got such returns. In fact, there would be many who bought shares at the wrong time only to witness substantial erosion in the value of their investment.

Mutual funds, at the other end, are run by fund managers who have specialized knowledge over stock-market investing, and track market movements on professional basis. This way, they are well-positioned to make suitable decisions to invest and de-invest in the markets as per the circumstances. Though mutual funds do not guarantee a win-win situation all the way, investing in proven funds actually has the capacity to meet your objectives. As a matter of fact, the specialized investment management by mutual funds has evidently produced returns as high as 80 per cent a year, which a naive investor rarely achieves in the course of direct stock market trading.

Types of Mutual Fund

Selecting a mutual fund scheme mainly depends on your risk appetite, investment horizon, and future needs. Once you work out these factors, you can choose a suitable scheme for yourself.

Meanwhile, Brix Research brings you the insights on the various types of mutual funds classified on the basis of their investment strategy and time horizons.

Corpus investment Equity or Balanced - Equity funds park their corpus anywhere between 65 and 100% in equities. Balanced funds, on the other hand, maintain a fine balance between equity and fixed income securities. The latter option offers you security and the rate of return is relatively lower than the equity fund.

Growth or Dividend - Under a Growth fund, the returns generated over the capital invested keep on accumulating, and your cost per unit increases in tandem. You can redeem your mutual fund units, in case you want to book profits. Choosing the dividend option, on the flip side, entitles you to receive returns in the form of dividend that is distributed among the investors, on a periodic basis. Although it depends on the company's policy, dividends are generally distributed 2-3 times a year.

Open-ended or Close-Ended - On the basis of investment horizon, mutual funds are divided into two categories: open-ended and close-ended. Open-ended funds allow you to purchase and redeem units at any time, however, in case of close-ended funds; there is a lock-in period under which you cannot redeem your mutual fund units for a certain period of time.

Specialty or Diversified - A Diversified Fund allocates its corpus into different sectors of FMCG, Auto, Petro, Pharma etc. In the event of slowdown in one sector, the other one may be able to compensate it. This way an investor invests his entire corpus in different companies and enjoys the advantages of diversification.