Types of Mutual Funds

Types of Mutual Funds

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Types of Mutual Funds

With rising financial awareness in the country, mutual funds have become the investment of choice for millions. Mutual funds are investment vehicles wherein capital is pooled in by a set of investors with a common financial objective. The fund is managed by professional fund managers who invest the accumulated money into various securities such as equities, bonds and money market instruments. Every investor is allotted units of the mutual fund in proportion to his/her investment. The fund manager invests the entire amount into a single asset class or distributes the corpus across financial instruments. If the value of the investment increases, the profits are distributed proportionately. Similarly, the losses are shared equally by the investors. The fund managers charge a fee or a commission for their services.

Mutual funds fulfil different purposes for different investors. Some people invest to fund their child’s marriage while some save and invest to buy a home. Many people do not want to stay invested for a very long time and seek funds with a short duration. Similarly, some people invest just to save taxes. Mutual funds on Finserv MARKETS offer a variety of mutual fund schemes to appeal to investors with varied financial goals. Mutual funds are categorised based on their structure, the asset class and the investment objective.

Mutual funds based on the asset class

Equity funds: When the money pooled from investors is invested in the equity market it is known as equity fund or stock funds. The fund is used to buy stocks of different companies and the performance is determined by the appreciation or decline in the value of the stock holding. Stock funds generate higher returns but are also riskier.

Debt funds: These funds have the money invested in debt instruments such as government bonds, company debentures, fixed income instruments and treasury bills. Debt funds are relatively safe and offer fixed returns. They are best suited for people looking for small bit regular income with minimum risk.

Money market funds: Also known as cash market or capital market funds, the collected funds are invested in money market securities such as T-bills, bonds and certificates of deposit. Investors receive a regular dividend from their investments in money market funds. It is an ideal choice to invest abundant funds.

Hybrid Funds: As the name suggests, hybrid funds invest in a mix of equity and debt. The proportion can be fixed or variable. The fund manager increases or decreases the exposure to equity or debt depending on the risk and returns.

Mutual Funds based on the structure

Open-ended funds: Open-ended funds do not have a lock-in period or restrictions on the number of units that can be sold. These funds provide liquidity to the investor as investors can exit the fund whenever they want at the existing Net Asset Value. The unit capital of open-ended funds keeps on changing with entry and exit of investors.

Closed-Ended funds: The unit capital that is to be invested in closed-ended funds is fixed. The fund managers cannot sell more than a pre-decided number of units. To provide liquidity to investors, closed-ended funds are listed on stock exchanges for trading.

Interval Funds: These funds are a mix of open-ended and closed-ended funds. Investors can invest or redeem their units at specific intervals. The duration of the interval is decided by the fund house.

Mutual funds based on the investment objective

Growth funds: These funds are focussed on growth and so the bulk of funds are allocated to growth sectors. Growth funds largely invest in stocks with growth potential. But growth comes with higher risk. These funds are best suited for young people who have a higher threshold of risk.

Income funds: Income funds are a cousin of debt funds and invest in fixed-income instruments. Investors who seek a relatively safe investment option which provides a regular income can opt for income funds.

Liquid funds: These funds primarily cater to investors who want to maintain ample liquidity in their investments. The accumulated fund is invested in short-term and very short-term investment instruments such as T-bills and commercial papers.

Tax-saving funds: These funds are focussed on saving taxes for its investors. The investment in tax-saving funds like equity-linked savings scheme is eligible for tax deduction under the Income Tax Act. The corpus is invested in equity markets and generate decent returns. These funds generally have a lock-in period.

Pension funds: People having a long-term horizon of investment can invest in pension funds. The investment in pension funds is made with an objective to accumulate a retirement corpus or for specific purposes such as child’s marriage or education.

Mutual funds based on risk

Very-low risk funds: Fund managers invest the collected money in short-term instruments which carry minimal risk. The tenure of very-low risk funds varies from a few months to a year.

Low-risk funds: During turbulent economic times, low-risk funds are the primary choice of investors. To reduce the risk, fund managers advise investors to opt for a mix of arbitrage funds and liquid funds. The return for investors decreases with risk, but investors can opt for other funds when the economic environment improves.

Medium-risk funds: As the name suggests, medium-risk funds carry moderate risk. The money is primarily invested in debt funds and equity funds. The debt portion provides stability while the equity portion provides returns. Medium risk funds can generate low-double-digit returns.

High-risk funds: Investors with the sole aim of chasing returns even if the risk is extremely high invest in high-risk funds. These funds require active fund management as the portfolio has to be regularly churned to generate high returns. These funds can generate mid to high double-digit growth.

Specialised mutual funds

Sector funds: These funds invest in a specific sector. For instance, energy funds will invest in power generation companies. The returns are dependent on the performance of the particular sector.

Index funds: These funds trace the performance of a stock market index. The investment is made in indices. For example, Nifty Bank index or BSE Sensex.

Funds of Funds: These funds invest in other funds. The return is dependent on the performance of the constituent funds.

There are many types of mutual funds and the list can be endless. The categorisation of mutual funds is a futile exercise as different funds and separate categories often overlap. A moderate risk fund is similar to a hybrid fund as both invest in a mix of equity and debt instruments. However, investing in mutual funds is not as complex as choosing the right fund. Once you have zeroed in on a suitable mutual fund scheme, you can just visit Finserv MARKETS and invest in four simple steps.  

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