Aditya Birla Sun Life Mutual Fund

Do mutual funds invest in both stocks and bonds?

Nov 04, 2019
3 mins | Views 6408

Mutual funds render the benefit of professional fund management and are slowly emerging as preferred investment option amongst beginners especially. The investors can also choose to invest in a wide range of mutual fund schemes, best suiting their financial goals and risk profile. SEBI Regulations allow the following five types of fund categories:

  1. Equity Schemes – These funds invest predominantly in equity and equity-related instruments.

  2. Debt Schemes – These funds invest predominantly in debt securities.

  3. Hybrid Schemes – These funds enjoy the flexibility to invest in different asset classes as per the scheme objective.

  4. Solution-Oriented Schemes – These funds are primarily aimed at investing towards specific financial goals, i.e. retirement planning, children’s education.

  5. Other Schemes – This is the residual category of mutual fund schemes and may include index funds, Exchange Traded Funds (ETFs), Fund of Funds (FoFs).

The mutual fund categories define the type of instruments the fund manager may invest into. While equity schemes may invest predominantly in equity stocks, the debt funds will be investing primarily in bonds, money market instruments, government securities, etc. However, a pure equity fund may also invest in short term debt securities to park their surplus funds and similarly, a debt fund may invest marginally in equity securities to gain from the growth potential of stock markets.

Here is an illustrative list of securities wherein different types of mutual funds make investments:

  1. Equity Shares – Equity shares are the most common investment option for the equity funds, driving a significant portion of the DII (Domestic Institutional Investors) inflows into the equity markets.

  2. Equity Derivatives – Derivatives are such contracts between two parties which derive their value from the underlying assets. So, the value of such contract will depend upon the movements in the values of underlying indices. Mutual funds generally allocate a part of their portfolio to equity derivatives to hedge their investment exposures. Arbitrage funds specifically use the arbitrage opportunities between equity and derivative markets to generate returns for the investors.

  3. Government Securities – Government securities, or G-Secs as they are commonly referred to, are the debt securities issued by Central and State Governments. These securities are generally raised by the Govt. to bridge their funding requirements. Such securities are perceived as secure investments, due to sovereign issuing entity. However, such G-Secs are typically issued for longer durations which may expose the investors to higher interest rate risk. Examples of funds typically investing in G-secs are gilt funds, Gilt Fund with 10 year constant duration, etc.

  4. Corporate Bonds – Corporate bonds are such debt securities which are issued by different corporates and banks, etc. which generally carry guaranteed interest rates. Since such bonds are issued by companies with different credit ratings, the credit risk of such bonds varies accordingly. Similarly, the duration of the bonds determines the sensitivity of the debt securities to the interest rate movements. Examples of funds primarily investing in such bonds are duration funds, corporate bond funds, credit risk funds, banking & PSU funds, etc.

  5. Short Term Debt Securities – As the name suggests, such securities are issued by corporates/ banks/ financial institutions/ Govt. for short term, such as T-bills (Treasury Bills), CDs (Certificates of Deposits), CPs (Commercial Papers), overnight securities etc. Given the short-term nature of such securities, the interest rate risk is minimal, and almost negligible for overnight and liquid funds, which invest in securities with pending maturity of 1 day and up to 91 days respectively.

The different securities discussed above are just an illustrative list of the kinds of securities for the mutual funds to invest in. However, the exact proportion of different asset classes (i.e., equity, debt, gold, etc.) and even the segments therein (e.g. market capitalisations, different duration securities, etc.) depend upon the fund category, investment objective, fund manager’s investment outlook.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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