September 24, 2020

What Are The Different Types Of Mutual Funds?

Mutual funds have earned a repute of one of the best investment vehicles over the years. The mutual funds are professionally managed by fund managers who pool the invested money in stocks, shares, bonds and other investment options. The performance of the mutual funds depends hugely on the expertise of the fund managers. There are different types of mutual funds in India to attract investors with their interesting schemes. Like any other investment instrument, mutual funds help investors to accomplish their financial goals. There are some types of mutual fund scheme which help investors to invest based on their investment objectives; you have to do your research well and select the best from them.

Different types of mutual funds

There are different types of mutual funds in the market. Investors can choose any from them, which is suitable according to the requirements. The types of mutual funds with examples are elaborated as follows.

Types of mutual funds based on the asset class

Equity funds

The investments made under equity funds are generally pooled in stocks in companies. The performance of companies plays a significant role in the returns of investors. The return rates are quite higher, however, the risk is moderately high as well due to its dependency on the ups and downs of the market. Based on the capitalization, the companies are categorized into three caps.

  • Large-cap companies: The companies who have a market capitalization of more than Rs. 20,000 crore are called the large-cap companies.
  • Mid-cap companies: The companies having market capitalization between Rs. 5,000 crore to Rs. 20,000 crore are called the mid-cap companies.
  • Small-cap companies: The companies with a market capitalization less than Rs. 5,000 crore are called small-cap companies.

Debt funds

Debt funds which are commonly known as fixed-income funds or bond funds mainly invest money in the assets such as the government securities or the tradable financial asset, corporate bonds, debentures, etc. The debt fund is a good choice if one aims for a steady return at low risk.

Money market funds

Money-market mutual funds mainly focus on short-term debt instruments such as cash, bonds and other types of cash equivalents which have high-quality ratings. It is the safest option to choose for investment as it has minimal risk as well as a predictable interest rate. The types of money market instruments are described below.

Certificate of deposit or CD

These are time-based deposits which are offered by any scheduled commercial banks. The investors are not allowed to withdraw the certificate of deposit before the maturity

Commercial papers or CPs

The CPs are mainly issued by the companies and the financial houses with high ratings. CPs are also known as the promissory notes. These are very unsecured instruments and issued at a discounted rate. The CPs are redeemed at face value.

Treasury bills or T-bills

The T-bills are issued by the government of India, focusing on raising money in a short-term like 1 year. It is the safest instrument as the rate of the return is risk-free, although it is a bit lower than the others.

Repurchase Agreements or Repos

Repos is an agreement under which the commercial banks can borrow money from the RBI. This involves the sale and the purchase of agreement simultaneously.

Hybrid funds

Hybrid funds are also known as the balanced funds or asset allocation funds. These are the types of funds which offer investors to invest in an equity fund and a debt fund at the same time. It offers investors with mutual funds that provide the combination of more than just one of the underlying investment asset classes like cash, bonds or stocks.

Types of mutual funds based on the structure

Open-ended mutual funds

Open-ended mutual funds allow the investors to start investing on any business day and it is upon the investors when they want to redeem the units. These funds are purchased and sold at their Net Asset Value (NAV).

Close-ended mutual funds

The close-ended mutual funds have a pre-defined maturity period. The investors are allowed to invest at the time of the launching only. The withdrawal of these also can happen only after maturity. These funds can be found listed on the stock markets; however, they are not very liquid due to the smaller amount of trading volumes.

Types of mutual funds based on the investment objective

Growth funds

The primary objective of the growth funds is tax breaks or capital appreciation. These funds invest a lump sum amount in the stocks. Henceforth it is relatively riskier as these have a higher exposure to equity. Although it is a great choice for long-term goals, it is better to avoid these types of funds if you have short-term investment goals.

Liquid funds

The liquid funds pool money in short-term money-market instruments such as the treasury bills, commercial papers, term deposits, commercial papers and more. Liquid funds help investors to build an emergency fund or stretch the tenure of the funds to ease the daily life problems.

Tax saving funds

The tax saving funds provide investors with the tax benefits under Section 80C of the Income Tax Act. The main advantage of investing in these funds is investors can claim deductions up to Rs. 1.5 lakh per year. The ELSS or the Equity Linked Saving Scheme is one of the tax-saving funds.

Income funds

The income funds aim to secure investors with a stable and steady income. It is a type of debt funds which mostly invests in the bonds, CPs, the government securities, etc. As it has a lower risk and different term goals, it is a pretty safe option for investors to choose. These types of funds often suggest investors to start investing via SIP or the Systematic Investment Plans.

Systematic Investment Plan

The main advantage of investing in mutual funds is that investors don’t need a considerable amount of money as capital. The fund houses of India allow investors to start investing with only a capital of Rs. 500 through the Systematic Investment Plans or the SIPs. SIP is a scheme of investing in mutual funds which suggests investing a specific amount of money at a fixed time period. This method helps to make steady returns and increase profit. SIP is beneficiary when the tenure is long. Many including Axis, ICICI and Mirae asset mutual fund offer the option of SIP.

People have been able to meet investment goals through mutual funds investment over the years. There are many types of mutual funds, as stated before. Each of them has different features and comes with various tenures. There are many mutual investment options available in India such as HDFC, Reliance and Quantum mutual fund online. Investors should take their adequate time to analyse the terms, conditions as well as the other aspects before choosing the most suitable fund for investment. If required, one can go to a consultant for advice upon the funds.