Mutual funds are becoming popular by the day as an effective means of long-term investment option. Your investment goals determine your choice of mutual fund investment from among the different types of mutual funds available to choose from. Let’s have a look at the 8 main types of mutual funds in India to help you decide which type suits your financial goals better.
What is a Mutual Fund?
A mutual fund is a financial pool that sources assets from shareholders to invest in financial securities like stocks, bonds, and other assets. This entails that each shareholder is a proportional participant in the gains and losses of a particular fund. Mutual funds provide exposure to a diverse range of professionally managed investment portfolios. Mutual funds are, however, bifurcated across categories depending on the types of securities they invest in, the
objectives behind their investment, and the type of returns they provide. Let’s delve deeper into the different types of mutual funds and how to choose the right one to invest in, depending on your preferences.
How are the Types of Mutual Fund Schemes Classified?
Asset management companies in India offer a number of mutual funds bifurcated across various categories. Mutual fund categories depend on the basis of different specialities and purposes they serve. Let’s have a look at the classification of mutual funds.
- Mutual funds based on structure
- Open-ended funds
- Close-ended funds
- Interval funds
- Mutual funds based on asset class
- Equity funds
- Debt funds
- Money market funds
- Balanced or Hybrid funds
- Mutual funds based on investment objective
- Growth funds
- Income funds
- Liquid funds
- Tax-saving funds (ELSS)
- Capital protection funds
- Fixed maturity funds
- Pension funds
- Mutual funds based on specialty
- Sector funds
- Index funds
- Funds of funds
- Emerging market funds
- International funds
- Global funds
- Real estate funds
- Commodity-focused stock funds
- Market neutral funds
- Inverse/leveraged funds
- Asset allocation funds
- Gilt funds
- Exchange-traded funds
- Mutual funds based on risk factor
- Low risk mutual funds
- Medium risk mutual funds
- High risk mutual funds.
8 Most Popular Types of Mutual Funds
After knowing the types of mutual funds and how they are classified, it is obvious to think about which mutual fund is best to invest in. Following is a list of the 8 most popular mutual fund types and their features to help you choose better!
- Equity funds
Equity funds invest in shares of different companies or equity stocks. These are the most common types of mutual funds that promise high returns but are also high-risk funds. Commonly an ideal choice for many and undoubtedly the most popular of all, equity funds also include specialty funds such as banking, infrastructure, consumer goods, etc.
- Debt funds
Debt funds invest in debt instruments. Mutual funds examples of debt funds are government bonds, company debentures, and fixed-income assets. Such funds are a popular choice owing to the fact that they provide fixed returns and are a safe investment option. These funds also do not deduct the tax at source and it is the liability of the investor to pay the tax when the earning reaches a certain amount.
- Money market funds
Money market funds invest in liquid pools. If you are looking at parking a surplus investment amount to gain moderate but immediate returns, then these funds are your best bet. However, it is important to note that money markets, commonly referred to as cash markets, do come with their own set of risks pertaining to credit, interest, and reinvestment.
- Index funds
Index funds are funds that mirror a portfolio of a financial market index like the BSE Sensex.
Such funds offer broad market exposure in addition to low operating expenses. Index funds follow the movement pattern of the index they cater to, and the returns earned are according to their movement on the index.
- Balanced funds
Balanced or Hybrid funds invest across various asset classes. In the case of such funds, at times, the proportion of equity is higher than the debt while in some others, it is vice versa. Balanced funds, thus offer a lower risk as compared to the equity market.
- Income funds
In the case of an income fund, the money is invested in a fixed-income instrument such as debentures or bonds. These funds provide a regular flow of income to its investors and also protect the capital investment.
- Fund of funds
Such funds invest in a variety of other mutual funds and provide returns depending on the performance of these target funds. Also referred to as multi-manager funds, fund of funds is a relatively safer investment option. The money invested in these funds effectively hold other funds, making it easier to adjust the risk associated with a particular fund.
- Specialty funds
Specialty funds are funds that specialise in the securities of a particular industry or group of industries. Also known as sector funds, these funds apply a targeted approach, investing only in the companies belonging to certain segments of the economy.
How to Choose the Right Mutual Fund to Invest in?
With so many different types of mutual fund options available, it is only natural to be overwhelmed and confused as to which type of mutual fund should you choose in your investment journey. However, the key to picking the right mutual fund is to first identify your investment needs. Next, you need to assess your financial goal – both in the long-term and the short-term. There are different choices of funds to invest in if you wish to grow your wealth slowly but steadily and also if you wish to gain better returns in a short period of time. Identifying your investment goal is the primary and most important part of making the right choice of mutual fund.
Once you have decided your investment needs and investment goals, the next step you need to take is to decide the amount of risk you are willing to take. It is obvious that the mutual funds offering the highest returns are also high in risk and vice versa. If attaining higher returns is your natural choice of selection and you are willing to take high risks, then you have your choice made. However, if you want to play it safe and don’t mind earning a slow income, then you should opt for a medium or low-risk investment.
Conclusion:
There is no denying the fact that mutual fund investments are a lucrative option in any individual’s investment journey. However, after having a detailed look at the types of mutual funds and their properties, it is imperative to understand that no matter how ideal a mutual fund is to your liking, there is always a risk factor attached to investing in it. It is thus important for you to read and understand the investment document with utmost care before you give the go-ahead. Seek the help of a professional if you need to. This will also help you to better understand the different facilities available to you owing to your investment.
