BASICS OF INVESTING IN MUTUAL FUND

 

One simple and safe way of investing in equity class is investment through mutual fund. So, before investing through mutual fund one should know the basics of how asset management companies use equities into different market cap. There are two ways by which an investor can invest one is through SIP and another is Lump Sum.

In mutual fund total equity class is divided into three categories one is large cap 2^nd is mid cap and rest is small cap. Each class has its own risk and return characteristics. These categories can be considered a proxy of their size or what is technically known as market cap.

Large cap companies have a well established business in the industry that they operate in. The profitability and sales growth of these companies are usually constant. So the performance of the large cap companies is typically stable compared with other smaller companies.

On the other end companies which are categorised under small cap they are in the early stage of business and have a lot of scope for expansion and growth. Hence they have the potential of earning very high profits compared with large caps. But they may not be financially strong enough to be able to withstand a bad economic situation. So investment in small cap is high risk and high return possibility.

Whereas companies categorised as mid caps are lie between large and small cap companies. Mid cap companies share some of the growth characteristics of small cap companies but they are less risky because they are slightly large.

Now, after understanding the pros and cons of various market cap fund it is good for investor to determine which fund is best suitable for his/her portfolio.