Different Types of Mutual Funds in India
The emergence of several investor awareness programmes has paved the way for the growth of the mutual fund industry in India. Besides, the promise of a diversified portfolio and high returns also make this investment instrument a popular avenue, especially among millennials.
However, the risk factors make it necessary to understand different types of mutual funds and aspects related to them to avoid incurring losses.
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What Are the Different Types of Mutual Funds?
Based on certain characteristics, mutual funds belong to various categories. As an investor, you need to assess your investment goals, risk appetite, suitable investment horizon and amount, among other factors, before choosing one of them.
Now, let’s have a look at the various types of mutual funds that are available in India -
Types of Mutual Funds Based on Asset Classes
- Equity mutual funds: These allocate 65% of funds in equity stocks or shares of companies. Note that the gains and losses depend on the performance of underlying shares in the stock market. Hence, it is pretty clear that the risk associated with them is also relatively higher than others. Besides being high-risk funds, these are also the ones offering the highest returns.
- Debt funds: These types of mutual funds in India generally invest in fixed-income securities like government bonds, company debentures, treasury bills, etc. Unlike equity mutual funds, debt funds provide relatively stable returns and avert stock market risks. Also, it does not involve TDS. If an investor earns more than ₹10,000 from such investments, he/she will have to bear the tax on it.
- Money market funds: Money market funds invest in liquid instruments like bonds, dated securities, T-Bills, certificates of deposits, etc. Also known as the cash market, the money market comes with reinvestment risks, credit risks, interest risks, etc. An excellent way to lower such risks is to choose a short-term plan (lower than 13 months) while investing these funds.
- Hybrid funds: These are a mix of bonds and stocks. Sometimes the proportion of debt is higher than the equity, while in other cases, it is vice versa. That is the reason why both the risk and returns are balanced in the case of hybrid funds.
Types of Mutual Funds Based on Structure
- Open-ended funds: This is one of those types of funds in mutual funds where you can invest and redeem those investments at any point in time. This is possible mainly because there is no definite maturity tenure for such funds, and the funds are generally liquid.
- Closed-ended funds: A particular maturity period and a stipulated investment period are there for closed-ended funds. Also, mostly newly launched investments comprise such funds. Plus, the unit capital is pre-defined, which means the fund company can sell only the number of units they have agreed to. Additionally, some funds come with an NFO or New Fund Offer period, where there is a specific deadline to buy units.
- Interval funds: This fund type consists of both open-ended and closed-ended funds. Because of that, these funds have certain features that allow the repurchase of shares at different intervals during the fund tenure.
Types of Mutual Funds Based on Investment Objectives
- Growth funds: These funds invest in equity stocks. These are suitable for investors with a long-term investment timeline due to the high risk they involve. As a matter of fact, millennials looking for higher returns on their investments are choosing this particular type among different types of mutual funds in India.
- Liquid funds: These funds fall under the debt fund category since it involves investing in the money market and debt instruments with duration up to 91 days. You can invest up to ₹10 lakh max, and the Net Asset Value (NAV) calculation will be for 365 days.
- Pension funds: Such types of mutual funds are generally suitable for long-term goals. This is because these funds distribute assets among equities and debt markets. Here, the former is risky, but offers higher returns. The latter provides steady returns, and the risk is also comparatively lesser.
- Tax-Saving funds (ELSS): It involves investing in equity shares, and the investments also qualify for exemptions under Income Tax Act. Even though these are a bit risky, you might get substantial returns if the fund performs well.
- Fixed maturity funds: These funds invest in both debt and money market instruments. Generally, it involves a fixed maturity period that ranges from one month to five years. Some investors also like to invest fixed maturity funds towards the end of the financial year to benefit from triple indexation.
- Capital protection funds: These kinds of mutual funds are split between bonds or Certificate of Deposits and equities. Even though they pose significantly low risk, it is ideal to choose a minimum duration of 3 years to avoid losses.
Types of Mutual Funds Based on Specific Sectors
- Sector funds: These are theme-based mutual funds that invest in specific sectors comprising only a few stocks. Even though they deliver great returns, the risk factor is quite high. This is why it is advisable for investors to be aware of different sector-related trends.
- Index funds: Such types of mutual funds mainly invest in instruments representing a specific index. It involves identifying stocks and corresponding ratios in the market index and, based on that, investing funds in a similar amount in the same kind of stocks.
- Real estate funds: The current state of the real-estate sector is quite promising. However, investors still hesitate to put their money in it due to the risk factors. Note that their long-term nature automatically lowers the risk. From builders to realtors, property management companies, to companies providing credit facilities, these funds can invest in any of them and at any stage.
Apart from these, there are different types of mutual funds based on this particular aspect, such as market-neutral funds, global and international funds, asset allocation funds, gilt funds, etc.
Types of Mutual Funds Based on Risk
- Low-risk funds: Investors looking for investment options that do not make them suffer due to monetary loss can opt for this particular type. These include gilt funds which invest in government securities for a substantial period. Note that the returns are also on the lower side because of the low risk associated with these funds.
- Medium-risk funds: Those looking for higher returns and ready to take some risk with their investments will find these ideal. These funds invest partly in debt and the rest in equity funds.
- High-risk funds: These types of MF are ideal for individuals seeking higher returns via dividends and interest. However, regular performance reviews become necessary in such cases since they are prone to market instability. Also, note that these types of funds provide 15-20% returns on investments.
Things to Consider While Selecting the Type of Mutual Fund
Here are some factors you should consider in order to choose the best mutual fund type for yourself:
- Investment Objective: Your financial goal is a primary aspect to keep in mind while making mutual fund investments. This includes the wealth you want to achieve with an investment plan. This way, it also becomes easier to decide between a long-term and short-term investment.
- Risk Tolerance: There is always going to be some sort of risk associated with the invested principal amount. By now, you must be already aware of the classification of mutual funds based on risk factor. Make sure to go through the risk factors for each type separately. This is because all of them differ from each other, depending on certain factors, including the time horizon.
- Consistency of Performance: You can only consider a particular mutual fund type ideal if it has been able to provide good returns consistently over a period of time. Make sure to assess the overall past performance before making a decision.
Also, you must evaluate an Asset Management Company's track record, performance against a benchmark, expense ratio, etc. Thereafter, select one among different types of MF in India.