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Types of Mutual Funds

Often it happens that one wishes to invest but doesn’t know where to begin. However, it may be that you are not aware of the stocks, bonds, and various types of mutual funds. We seek to simplify the meaning of different types of mutual funds and their details in the following discussion.

What are Mutual Funds?

In particular, mutual funds are a mechanism by which money from investors like you and others is pooled and invested in securities like stocks, bonds, and other types of investment opportunities, which will be in accordance with the objectives as mentioned in the offer documents.

To know more about the types of mutual funds in India, click here.

Generally, the investments in securities are spread across a wide category of industries and sectors consequently diversifying the risk as not all stocks will move in the same direction and proportion all the time.

Types of Mutual Funds in India

Mutual funds provided you a wide variety of choices for your investments. You can select them on the basis of your risk appetite, financial goals, and time horizon. Here we are sharing the 10 types of mutual funds. Read the details about all the types to know what will be the best suitable fund type for your financial goals.


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1. Liquid Funds 

Generally, a Liquid Fund is a type of debt fund which seeks to invest in fixed-income instruments like government securities, treasury bills, and commercial paper, with a maturity period of up to 91 days. For a liquid fund, Net Asset Value or NAV is calculated for 1 year. Within 24 hours, the investors can get their withdrawal completed. These funds also have the advantage of having the lowest interest rate risk, meaning, they will not be hugely affected by a change in the interest rates.

Hence, the investment objective of such a fund is to safeguard capital and offer liquidity.

Risk Type: low risk-low returns

Suitable For:  Investors looking for options to invest their idle money should consider liquid funds as an alternative to a regular savings bank account.

 

2. Debt Funds

Debt Funds invest in securities which can generate fixed income like government securities, commercial papers, treasury bills, etc. They have a pre-determined maturity date and interest rate which the investor will receive on maturity. Therefore, market fluctuations do not affect the returns of these funds.

Risk Type: Low risk

Suitable For: For those who are not willing to take Equity exposure.

 

3. Balanced Funds

In short, Balanced Funds invest in a combination of both debt and equity segments in specified ratios. They are also called ‘hybrid funds’. They help the investors to diversify their mutual funds portfolio. In short, they provide a balance between debt and equity segments and help to maximize the returns on investment.

Generally, these funds invest 40%-60% of the fund’s portfolio in equities. Hence, the most important benefit of balanced funds is they provide capital appreciation and give protection against risks.

Risk Type: Low risk

Suitable For: Ideal for those who want a mixture of capital appreciation, income as well as a low-risk investment opportunity.

 

4. Sectoral Funds

Generally, these are equity schemes that invest in a specific sector of the economy. The sectors can be infrastructure, energy, utilities, etc. Sectoral Funds can also invest in stocks of companies with different market capitalizations and allow investors to invest in best-performing stocks in a specified sector. It helps the investor to get exposure to an entire sector that is expected to experience good growth.

Risk Type: High risk

Suitable For: Investors with an investment horizon of 5-7 years or more can look for this option.

 

5. Index Funds

Generally, Index Mutual Funds invest in stocks that replicate a stock market index like BSE Sensex, NSE Nifty, etc. Moreover, these funds are passively managed by the fund manager, which means that they invest in exactly the same securities as present in the mentioned index and in the same proportion without changing the portfolio composition. These funds offer returns that are comparable to the index they are tracking.

Risk Type: Low risk

Suitable For: Investors with an investment horizon of 5 years or more.

Types of Mutual Funds

6. Diversified Equity Funds

This fund invests in equity and equity-related instruments regardless of their market capitalizations or sectoral connections. A diversified equity fund has the required flexibility to either increase or decreases their exposure to the large-cap, mid-cap and small-cap stakes depending on the inferences the fund manager draws from the market situation from time to time.

Risk Type: High risk

Suitable For: Investors with moderate-risk appetite and wanting to have an exposure in equity.

 

7. ELSS Funds

Equity Linked Savings Scheme or ELSS are equity funds that invest a majority of their corpus share in equity-related schemes or instruments. They offer a tax exemption of up to Rs. 150,000 under section 80C of the Income Tax Act on the annual taxable income.

This scheme has a mandatory lock-in period of 3 years. Many taxpayers have turned to this scheme over the past few years due to the tax benefits it offers.

The income you will earn after the 3-year period in this scheme will be taxed as Long Term Capital Gains (LTCG) at 10% (If the income is above Rs. 1 Lakh).

Risk Type: Moderate risk

Suitable For: Investors who have moderate to high-risk appetite.

Click here to know the top 5 ELSS funds you can invest in.

 

8. Mid-Cap and Small-Cap Funds

Mid-cap funds invest in equity and equity-related instruments of Mid-cap companies. According to the SEBI, Mid-cap companies are those which are ranked in between 101 and 250 in the list of companies as per market capitalization.

They offer better returns in comparison to the large-cap funds but are more volatile while mid-cap funds are more stable in comparison to the small-cap funds but offer fewer returns.

Small-cap funds invest in equity and equity-related instruments of Small-cap companies. As per SEBI, Small-cap funds need to invest 80% of their total assets in small-cap companies. In terms of market capitalization, these companies ranked below 250th rank.

Mid-Cap                                                                                              

Risk Type: Moderate to High risk                                   

Suitable For: Investors with a very high-risk appetite 

Small-Cap

Risk Type: Moderate risk

Suitable For: Long Term Investors (8-10 years)

 

9. Exchange Traded Funds

ETF is a pooled investment that gives exposure to an area of the market like one can invest in commodities, stocks, currencies, etc.

One can buy shares from any brokerage and at any convenient time. Usually, the ETF’s are traded on a stock exchange, but it has attractive features like low cost and tax efficiency.

ETF’s pay the dividend received from the underlying stocks on a quarterly basis.

Risk Type: Low risk

Suitable For: Small Investors who have to low risk appetite but wish to take benefit of intraday price changes.

 

10. Fund of Funds

Fund of funds invests in other mutual funds. Such an investment is termed as ‘multi-manager investment’. These types of mutual funds invest in a portfolio that has various underlying assets in place of investing directly into stocks, bonds, and other securities. It is also a good mutual fund to invest in if risk appetite is minimal.

In short, it provides good exposure and lower risks through diversification and asset allocation by investing in a wide variety of fund categories.

Risk Type: Low risk

Suitable For: Small Investors who do not want to take higher risks.

 

Conclusion

Undoubtedly, Mutual Funds are an attractive investment option that offers good returns in comparison to a simple savings account. A fund manager appointed by AMC manages every mutual fund portfolio.

There is a huge list of types of mutual funds to choose from in the market and the same should be done in accordance with your risk appetite and objective. However, there are also drawbacks like exit load, costs by the asset management firm in addition to the market risks which need to be factored in before starting an investment.


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