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What Are The Main Types of Mutual Funds in India?

Here’s what you should know about your Mutual Funds (MF) risk and reward profiles.

Anshika Bajpai |

Updated:February 19, 2019, 4:23 PM IST
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What Are The Main Types of Mutual Funds in India?
Image for representation only.

When you start thinking of finance and investment, chances are you start thinking about Mutual Funds (MF), too. There are several mutual funds on offer and you’ve probably heard of them through advertising, friends and family or even from your savvy financial planner. But, what is a Mutual Fund? Simply put, MF’s gather money from various people and invest it on their behalf for a small fee.

So, what are the kinds of MF’s available in India?

Mutual Funds in India are majorly based on;

● Investment objectives

● Asset class

● Structure

Mutual Funds Based on Investment Objectives

Income Funds - These schemes help you invest mostly in fixed income options like debentures and bonds to give investors a regular income and capital protection.

Liquid Funds - Liquid Funds mostly invest in short and very short-term options like CP’s and T-Bills with the singular goal of providing liquidity. They are considered low-risk with moderate Return On Investment (ROI) and are best for investors with short-term investment plans.

Mutual Funds Based on Asset Class

Mutual Funds in this category usually yield large returns and are mostly invested in equity stock or shares of companies. This also means they are more affected by market volatility and hence are considered high-risk.

Equity Funds - There are 10 different kinds of equity funds. All of them are invested directly in equity stocks or shares of companies and can give very high returns but can be high-risk as they depend on how the stock market performs.

Debt Funds - These schemes invest in debt securities like government bonds, company debentures and fixed income assets. Safer than equity schemes, they provide modest but fixed returns and have 16 different sub-categories to choose from.

Money Market Funds - These schemes are quite safe and invest in liquid options like CP’s and T-Bills and can give you moderate but immediate returns - perfect if you have a huge surplus to work with.

Hybrid Funds - These schemes invest in different asset classes and are usually a mix of equity and debt. Depending on how much risk you are comfortable with, you can pick schemes that balance your risks and returns.

Sector Funds - This kind of scheme invests in particular divisions or market sectors like infrastructure companies. Depending on how well that sector does, ROI will defer. Risk incurred depends largely from sector to sector.

Index Funds - These investments represent a specific index on the exchange (i.e. shares from the BSE Sensex) that monitors the returns and movements of that index.

Tax-Saving Funds - Equity Linked Saving Schemes (ELSS) or tax saving mutual funds mainly invest in equity stocks and shares and qualify for a deduction of up to INR 1,50,000 per financial year under section 80C of the Income Tax Act, 1961. While these are usually considered high-risk, returns can be high if the funds perform well.

Funds of Funds (FOF) - Also known as multi-manager investments these schemes work by investing in other types of mutual funds. Return, in this case, depends on the overall performance of the targeted funds.

Mutual Funds Based on Structure

Open-ended Funds - Open-ended funds are attractive mainly because they offer instant liquidity. They can be bought and redeemed throughout the year and have no definite expiration date. However, they can only be bought at the current Net Asset Value (NAV).

Close-ended Funds - By comparison, close-ended funds are preferred by those who want to lock in their money for a fixed period. They can only be bought during an initial period and can only be redeemed on maturity. In order to provide liquidity, they are listed and traded on the stock exchange.

Once you understand how many kinds of Mutual Funds there are, you can easily figure out which ones are better suited to your investment style and overall financial goals.

To know more, click here.

This content has been created in association with YONO SBI.

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