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Types of Mutual Funds to Invest in India
The emergence of several investor awareness programs 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.
Scroll down to learn more about it!
Table of Contents
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 different types of mutual funds in India based on asset classes, risk, and investment goals.
Types of Mutual Funds Based on Asset Classes
1. 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 the 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.
2. Debt funds
These types of mutual funds in India are generally invested 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.
3. 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.
4. 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
The following table shows all the types of leveraged funds.
Types of Mutual Funds Based on Investment Objectives
1. Growth funds
These funds are invested 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.
2. Liquid funds
These funds fall under the debt fund category since it involve investing in the money market and debt instruments with a 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.
3. 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.
4. Tax Saving funds (ELSS)
These involve investing in equity shares, and the investments also qualify for exemptions under the Income Tax Act. Even though these are a bit risky, you might get substantial returns if the fund performs well.
5. 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.
6. Capital protection funds
These kinds of mutual funds are split between bonds or Certificates of Deposits and equities. Even though they pose a 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
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
1. 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.
2. Medium-risk funds
Those looking for higher returns and ready to take some risk with their investments will find these ideas. These funds invest partly in debt and the rest in equity funds.
3. 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 When Selecting the Type of Mutual Fund
1. 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.2. 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 factors. 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.3. 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.Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.
We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.
FAQs about Types of Mutual Funds
Which type of mutual fund will allow you to earn profits when the market is down?
Which is an ideal mutual fund type for investors with a low-risk appetite?
What are the 4 types of mutual funds?
The 4 types of mutual funds in India are:
- Equity Mutual Funds
- Debt Mutual Funds
- Hybrid Mutual Funds
- Money Market Funds
What are the types of mutual funds based on structure?
The types of mutual funds based on structure are:
- Open-ended Funds
- Closed-ended Funds
- Interval Funds
Other Important Articles about Mutual Funds
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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