Investing in mutual funds is like choosing the right ride that you can enjoy without fear

What is Mutual Funds?

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund derived by the aggregating performance of the underlying investments.

  • Types of Mutual Funds

There are various types of mutual funds on the basis of the maturity period and investment objectives. Let’s take a look at the various types of mutual funds

On the basis of the type of underlying asset in which investment is made, the following are the various types of mutual funds:

  • Equity Schemes

The aim objective of these schemes is to provide capital appreciation over a medium to long- term investment horizon. As per the regulations of SEBI, an equity mutual fund scheme should invest at least 65% of the scheme’s assets in equities and equity-related instruments. As the investment is made in equity products, these funds are comparatively high risk.  This scheme is suited for investors who have a good risk appetite and are looking for capital appreciation over a long-term investment horizon.

  • Debt Schemes

This type of mutual fund scheme invests in fixed income instruments, such as bonds issued by the government and corporate, debt securities, and money market instruments, etc.  These funds have a fixed rate of interest which allows the investors to be aware of the returns right at the time of investment. It is a great investment option for investors who want to play it safe but want steady returns.

  • Hybrid Scheme

These schemes invest in equities and fixed income securities in the proportion indicated in their offer documents. The aim of these schemes is to provide both growth and regular income.  This is a great option for investors looking for moderate growth. Typically, the distribution between equity and debt instruments is in a 40:60 ratio. However, these funds are subject to market volatility as equity instruments are part of the investment portfolio.


Types of Mutual Fund Based on Structure

On the basis of structure, there are three types of mutual funds in India:

  • Open-Ended Funds

These schemes are available for subscription and repurchase on a continuous basis. There is no fixed maturity period. Investors have the option to buy and sell units at NAV which is declared on a daily basis. The past performance of these assets can be tracked which allows the investor to make a well-informed decision. If the investor is looking for liquidity alone, these funds are a great option.

  • Close-Ended Funds

In a close-ended mutual fund, a fixed number of units are issued. These units are traded on the stock exchange. A closed-end fund functions like an exchange-traded fund. Units of a close-ended mutual fund are available for purchase during the NFO period. The units can be traded at premiums or discounts to their NAVs.  Redemption is allowed only after the maturity of the fund which is typically between 3 to 7 years. The main feature of this scheme is that provides stability. This allows the portfolio managers to build a steady asset base and devise the right investment strategy.

  • Interval Funds

This is a hybrid fund that has the characteristics of both open-ended and close-ended funds. These funds can be purchased or sold only at specific intervals as per the discretion of the fund house. The fund remains closed for the rest of the time. This works best for investors who want to have a lump sum amount of savings in a short period of time.


Types of Mutual Funds Based on Investment

Following are the types of mutual funds in India based on the investment strategy:

  • Growth Funds

These funds apportion a large portion of the investment money in shares. This is a good option for investors who want to invest their surplus money and have a risk appetite.

  • Income Funds

This fund scheme invests the money in bonds, certificates of deposits and securities among others. This scheme is best suited for risk-averse individuals who have a few years of experience in investment.

  • Liquid Funds

This scheme invests in debt instruments and money market instruments that have a tenure of up to 91 days. The investor can invest only up to Rs 10 lakhs. The NAV of the liquid fund is calculated for 365 days, whereas the NAV of other funds is calculated only on the basis of business days.

  • Tax-Saving Funds

Equity Linked Saving Scheme is one of the most popular tax saving schemes. The lock-in period of these funds is 3 years. It also offers a good rate of return. This scheme is best for long-term and salaried investors.

  • Aggressive Growth Funds

These funds help you to make a huge monetary gain by investments in the equity market. You can use beta which is a tool to gauge the fund’s movement in comparison with the market. However, this fund is very susceptible to market volatility.

  • Capital Protection Funds

These funds invest a large portion of the money in bonds and certificates of deposits and the balance in equities. However, the fund offers small returns. This scheme can provide full protection to your capital.

  • Fixed Maturity Funds

As the name suggests, this scheme invests for a maturity period. The investment is primarily in bonds, securities, money market etc. The maturity period is between 1 month to 5 years.

  • Pension Funds

A pension fund allows you to build a corpus for your retirement. The pooled in money is invested in a variety of assets through the pension fund. Some of the common pension plans in India are unit-linked which invest in both equity and debt instruments. The government has also launched the National Pension Scheme which invests either 100% of the investment amount in government securities or 100% of the investment amount in debt securities (other than government securities), or a maximum of 75% in equity.

  • Types of Mutual Funds Based on Risk

As is the case with most investments, mutual funds are subject to various risk factors. On the basis of the level of risk involved in the investment, the following are the types of mutual funds in India:

  • High-risk Funds

Most equity schemes are high-risk funds. These work best for investors with a huge risk appetite who want huge returns. These funds need active fund management. They are subject to market volatility. You can expect 15% returns, though most high-risk funds generally provide 20% returns and 30% in some other cases.

  • Medium-risk Funds

Most debt funds fall into this category. The risk factor is medium as the majority of the investment is in debt and the rest in equity funds. The NAV is not that volatile. The and the average returns are between 9-12%. These work best for investors who do not have a very high-risk appetite and want steady returns.

  • Low-Risk Funds

If the investor is unsure about the investment decision or there is a sudden crisis in the market, it is recommended to invest the money in either one or a combination of liquid, ultra-short-term or arbitrage funds. The returns offered are low, but the risk associated with these funds is also very low.

  • Very Low-Risk Funds

Examples of this category of funds are liquid funds and ultra-short-term funds. These investments are not risky at all. However, the returns from this scheme are very low. These work best when the investor needs to fulfil a short-term financial goal and wants a low-risk option.


Specialized Types of Mutual Funds

Here are the special types of mutual funds in India:

  • Gilt Funds

These funds invest exclusively in government securities. There is no risk of default from these investments. However, the NAVs of these schemes are susceptible to change in interest rates and other economic factors.

  • Index Funds

These funds replicate the portfolio of a particular index such as the BSE Sensitive index (Sensex), NSE 50 index (Nifty), etc. These schemes invest in securities in the same weightage comprising an index. The increase or decrease in the NAV is in accordance with the rise or fall in the index. However, it does not mirror the index exactly by the same percentage due to some factors known as “tracking error”.

  • Fund of Funds

A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. A FoF scheme enables investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.

  • Foreign Funds

Foreign Mutual Funds are favoured by investors seeking to distribute their investment to other nations. This can deliver excellent yields to i

Here are the special types of mutual funds in India: