What Type of Mutual Fund Schemes Should You Invest in? Know Here
Equity funds are mutual funds which invest majorly in equity stocks of listed companies. They are considered to be risky but they tend to give higher returns in the long term.
An investor fills out a repurchase form at the office of India's largest mutual fund manager, the Unit Trust of India (REUTERS)
If you are planning to put your money in mutual funds (MFs) this year, you should first understand the various kinds of schemes that are available in the Indian market in order to make correct choices for specific financial goals. Mutual funds can be classified under various categories:
On the Basis of Asset Class
Equity funds: Equity funds are mutual funds which invest majorly in equity stocks of listed companies. They are considered to be risky but they tend to give higher returns in the long term.
Debt funds: Debt funds usually invest in government securities, corporate bonds etc. Debt funds are more stable and less volatile to the market conditions.
Money market funds: A money market refers to the mutual funds that are highly liquid and where the money is invested in short-term investments such as deposits certificates, treasury bills etc. You can have your money invested in money market funds for even a day.
Balanced or hybrid funds: Balance or hybrid funds are a mix of equity and debt funds. They tend in to invest an equal amount in equity and debt funds to keep the risk level balanced in the investment.
On the Basis of Investment Goal
Growth Funds: These are mutual funds where the money is invested with the primary purpose of capital appreciation. Although growth funds are risky, they tend to offer high returns in the long run.
Income Funds: The funds that invest in fixed income instruments like government bonds and debentures fall under the income funds category. The primary purpose is stable income on investment with modern growth of capital.
Liquid Funds: Liquid funds invest in short-term instruments like treasury bills and deposit certificates for the purpose of providing ease of taking out money anytime. They are seen as low-risk funds with average returns, and are ideal for people looking for very short-term investment.
Tax-saving Funds (ELSS): Equity-linked savings schemes (ELSS) or tax saving mutual funds come under Section 80C of the Income Tax Act 1961. Investments in these funds qualify for a deduction of up to Rs1.5 lakh for a financial year. Most of the money gets invested in equity stocks, but with a lock-in period of three years.
Capital Protection Funds: If protecting your money is your priority, capital protection funds can serve the purpose while earning relatively smaller returns (12% at best). The fund manager invests a portion of your money in bonds, or deposit certificates and the rest in equities. You will not incur any loss. However, you need at least three years to safeguard your money.
Fixed Maturity Funds: In fixed maturity funds, the investment is made in closed-ended debt funds having a fixed date of maturity (1 month-5 years from the date of investment).
Pension Funds: In such funds, money is invested are for a longer period of time keeping in mind the objective of getting a regular pension to the investor when he retires. The money in the pension funds gets invested in equity and debt instruments where equity helps the investment grow and debt maintains a balance of risk. The returns on the pension fund can be withdrawn as a lump sum, or as regular pension, or even as the combination of both.
On the Basis of Specialty
Sector funds: Sector funds are the funds that stick to one sector of the industry when investing. So for example, tech funds will only invest in companies which are in the IT business or IT sector. The returns of the investment also depend on the performance of the particular sector.
Index Funds: The index fund is a type of investment which is made to match the working of a broader market index like BSE Sensex. These funds provide broader exposure to the market, less operating cost and low portfolio turnover.
Fund of Funds: Funds of funds are the types of mutual funds that invest in other mutual funds. The returns solely depend upon the performance of the target fund. These types of funds are also referred to as multi-manager funds.
Emerging Market Funds: In emerging market funds, the investment is made in developing countries growing economically at a good rate. These funds are considered risky as a lot of other factors depend on the performance of political and economic situations of the particular country.
International Funds: International funds invest their money in international companies located in other parts of the world. International funds are also known as foreign funds. The money in international funds will not be invested in the investor's own country.
Global Funds: These are similar to international funds and invest their money in companies located all across the world. The only difference from international funds is that investment can also be made in the same country of the MF investment.
Real Estate Funds: The real estate funds invest their money in the real estate business. The investment can be made at any phase of the project.
Commodity-focused Stock Funds: The investment is done in companies that are working in the commodities market, for example, mining companies or producers of commodities. Performance of these funds is directly linked to the performance of those commodities in the market.
Market-neutral Funds: These funds do not invest directly in the market. They invest in securities, treasury bills with the aim of steady and fixed growth.
Inverse/leveraged Funds: These funds don't operate as a normal mutual fund. They make a profit when the market falls and incur a loss when the market does well. The risk factor in such funds is very high as they can make you huge loss or profit as per the market conditions.
Asset Allocation Funds: These funds allow the portfolio manager to adjust the allocated assets from time to time to achieve results. The
amount of investment gets divided into such funds to invest in different instruments like bonds and equity.
On the Basis of Structure
Open-ended Mutual Funds: They are the most common type of mutual funds available. MF houses trade units of mutual funds at NAV (net asset value). Open-ended funds allow the investor to exit anytime and make payout on the basis of the NAV, which is published by the fund houses daily.
Close-ended Mutual Funds: On the closing of any New Fund Offer (NFO), investors cannot trade their units. The price of the closed-ended mutual funds is based on the demand and supply just like stocks. Closed-ended mutual funds are not liquid and the prices are less than the normal price per unit due to less volume of trading. Investors cannot enter nor exit from the scheme till the term of the scheme ends.
Interval Funds: The funds which have features of both open-ended and closed-ended schemes are called interval funds. Interval funds are closed funds with an option to transact directly for a certain pre-decided period. They have open-ended feature during that pre-defined period and are close-ended for the rest of the time.
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