How Mutual Fund Is An Efficient Tool To Access Different Asset Classes?

By Subodh / December 2, 2015

You may have wondered often on what the best and most rewarding methods for saving are. This would of course apply especially to people that might be married and have children or other dependents relying on them. People that have the foresight to visualize and plan for their – and their family’s – futures tend to deploy a variety of means to achieve their goals of financial stability, independence and growth. When one surveys the financial markets for the kinds of investment options available, there are some that are most commonly used by a large number of the public: equity, debt, real estate and commodities.

Mutual Funds

Types of Mutual Funds

When you survey the market – there are mutual funds with different kinds of objectives that are available. For instance, you may choose to invest in either wealth creation (and growth oriented) funds or income generating (and protection oriented) funds. The former kinds of funds aim to grow the initial corpus of money you invest, often very aggressively. Because these aim to grow the corpus as aggressively and quickly as possible, they also carry a much higher risk of losing your money.

Caveats Regarding Certain Funds

The literature that accompanies these funds will invariably have language that will highlight that these growth-oriented funds carry a significant amount of risk – of possibly even losing your money altogether. Indeed, the rules regarding such cautionary language also tend to require that the funds should highlight the level of risk associated with investing in them by including warning signs in specified colors – such as blue for low risk, yellow for medium risk and brown for high risk. On the other hand, funds that seek to only generate income and are oriented towards protecting your money – will very likely not be invested in any high risk asset or investment classes.

Funds for Accessing Different Asset Classes

Of course, mutual funds come in a variety of forms that may be tailored to your specific needs – even when it comes to the kinds of assets you may want to invest in. We will now consider the specific asset classes.

Equity Mutual Funds

The first of these – indicated earlier – is equity. Equity as an asset class refers to the shares and stock of companies that may be invested in. There are a variety of investment products, even within the category of equity assets. Thus – for instance – you may choose to invest in mutual funds that will only invest in assets in specific sectors. These sectors could be like automobiles, infrastructure, power generation companies, banking and financial companies, information technology, e-commerce, etc. If you are an investor that is aware of the prospective performance (and returns) of businesses operating in these different sectors, you may choose to invest in mutual funds that will invest in these specific sectors that you may favor.

Debt Assets as an Asset Class and Interest as the Return on this Investment

Debt Mutual Funds

Just as with funds, accessing equity assets, you have a number of mutual fund investment products that invest in debt (i.e., bonds, etc.). Now – most companies whose stock you own will pay you periodic dividends depending on whether they have made profits during that particular period. Also, the quantum of the dividend is never certain – and can vary. In contrast, the return from the asset class of debt assets will pay you a specified sum at a pre-agreed rate of interest and on the completion of specific periods. It is important for you to pay attention to this distinction when you are considering investing in different asset classes.

Real Estate Investment Trusts (REITs)

A third asset class that is available in the mutual fund market are the Real Estate Investment Trust (REITs). These are funds that own and operate real estate. These are generally considered a good income generating assets as REITs are obligated by law to distribute at least 90% of their profits as dividend to shareholders. A fourth asset class worth mentioning is: commodities. There are funds that invest – for instance – in gold in such a way that you don’t actually have to own and manage the actual gold; all you do is invest your money and watch what happens to the price of this commodity over time. Redeeming is – again – just as simple.

Mutual Funds are a Great Way for Prudent Investors to Invest

Thus mutual funds offer you a very good way of securing your investments for shorter or longer terms. They allow you to do so in a way that permits you to choose the kind of asset class you may want to invest in. What’s more – these funds allow you to do this in a very efficient and cheap manner!