Before Investing in Mutual Funds it is important that you understand different types of Mutual funds in India & Identify the Mutual Fund which fulfils your Investment Goals. Mutual funds can be classified on the basis of the following types.
(Also If you are Beginner and Want to know what are Mutual Funds in Depth – Click Here)
Types of Mutual Funds on the Basis of Class
1) Equity Mutual Funds – Equity Mutual Funds Invest their Major Investment Portfolio into Stocks. They Invest Money received from Investors into Shares of Different Companies. The Returns in Scheme are determined by Returns in Share Investment made by the Fund. Equity Funds have high risk & high reward ratio they generate very good returns for their investors but also come with the risk of Equity Investment.
2) Debt Mutual Funds – Debt Mutual Funds invest in Securities like bonds, Company Deposits, Company Debentures etc. They Invest in securities with fixed Interest rate and maturity period. Debt Mutual funds are generally risk-free and give better post-tax returns as compared to Bank Fixed Deposits.
3) Hybrid Mutual Funds – Hybrid Mutual Funds (Balanced Funds) Invest their portfolio in both Shares & Debt Securities. They provide aggressive returns of equity with a cushion of the comfort of Debt Investment. Normally Close to 60% -75% Investment is made in Equity Rest in Debt. Hybrid Funds are Suitable for Investors who want better returns with a Comfort of Debt Investment.
Types on the Basis of Restrictions
1) Open-Ended Funds – Open-Ended Funds do not have any constraint on units or time period. The investor can freely trade at their convenience and exit the fund when they like. Open-Ended Funds are free to open for investment unless the AMC decides to Stop fresh Investment in the Scheme.
2) Closed-Ended Funds – Closed-Ended Funds are the exact opposite of Open-Ended Funds. These Funds have some restriction in regards to selling more than a pre-agreed number of units. It has a specific maturity period & SEBI mandates investors to be given either repurchase option or listing on stock exchanges to exit the scheme.
3) Interval Funds – Interval Funds have a trait of both open-ended funds & closed-ended funds. These funds can be purchased or Sold as decided by the fund house. No transactions are permitted during the tenure.
Types on the Basis of Nature
1) Index Funds – Index Funds are Mutual Funds which replicates Investment Style of Particular Index. These funds generate the same returns of the Index they are mimicking. These are best suited for Passive Investors.
Also Read – What is an Index Fund & How it works?
2) Sector Funds – Sector Funds are Mutual Funds which Investor Stocks in a Particular Sector. Ex. Pharma Funds invest in Pharma Stocks, Banking Funds Invest in Banking Stocks, IT Funds invest in IT Stocks. These funds have the potential to generate great returns and they are also high risk due to their concentrated nature of Investment.
3) International Funds – As the name suggests International Funds invest in Foreign Stocks. These Funds are favoured by Investors as they have spread portfolio outside India, even if Indian Stock Markets do not do well Investors can get good returns due to their Investment in International Funds. The International Funds concentrate solely on foreign markets.
4) Global Funds – Global Funds are different from international funds. Global Funds target whole world Equity Markets whether Both Foreign & Home Equity Market. Global Funds can be risky due to currency fluctuations, government policies etc.
5) Real Estate Funds – Real Estate Funds as the name suggests Invest in Real Estate Companies. Real Estate Fund can be a perfect alternative as Investor indirectly investors in Real Estate Companies Rather than Direct Investment in Real Estate Projects. It less risky as compared to direct Investment and it also reduces the legal issues of purchasing a property on your own.
6) Gold Funds – In India Gold is the only commodity in which Mutual funds can invest directly. Gold Funds are Ideal for risk appetite investors looking for Gold Based Returns. and diversification in their portfolio.
7) Exchange-Traded Funds – Exchange Traded Funds (ETF) are Funds which are bought & sold on Exchanges just like equity Shares. ETF has introduced more options to investors looking for more diversified options.
Types on the Basis of Needs
1) Income Funds – Income Funds as the name suggests providing for regular income from a Mutual Fund. These funds invest in liquid securities such as short term debt, short term bonds etc. Regular Dividend is paid from the Mutual Funds to provide Regular Income to its Investors.
2) Growth Funds – Growth Funds are the exact opposite of Income Funds. These funds invest in Growth Securities such as Equity and do not pay any form of profit back to its investors in any form. Growth Funds are good for Investors looking for Form a Huge Corpus for their various goals such as retirement, house, higher education.
3) Liquid Funds – Liquid Funds are suitable for short term Investment for 7 Days to Less than a Year. These funds invest in highly liquid Securities which can be redeemed easily to repay the Investors. Liquid Funds Offer Returns of Fixed Deposits of 6%-7% p.a.
4) Fixed Maturity Funds – Fixed Maturity Plans are Closed-Ended Debts Fund. It Means Investment can be made at the time of NFO (New Fund Offer) Only. It comes with fixed Maturity Period & Invests in High Rated Debt Securities over the period of the fund.
5) ELSS – ELSS Stands for Equity Linked Savings Scheme. ELSS are Interval Funds where there is a lock-in period of 3 Years from the Date of Investment. Investment in ELSS is Eligible for Tax Deduction under Section 80C of the Income Tax Act’ 1961. ELSS Funds help in Tax Saving and Wealth Creation at the same with the help of Equity Investing Power.
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These are types of Mutual Funds, you can make your investment decision on the basis of investing style of Each Fund. If you have any question do let us know in the Comments Section Below and we will make sure to reply & Thank You very much for Reading.