Mutual funds are a popular investment option in India, where a group of investors pool their money together to invest in a portfolio of securities such as stocks, bonds, and other assets. Mutual funds are managed by professional fund managers who invest the money (collected from investors) in various securities in order to gain returns.
There are several types of mutual funds available, each with its unique characteristics, investment objective, and risk profile. Investors can choose a mutual fund that aligns with their investment goals, risk appetite, and investment horizon. It is always important to seek professional advice before investing in mutual funds.
Types of Mutual Funds Based on Asset Class
Asset class-based classification of mutual fund schemes is determined by the type of assets in which they invest. These are the main types of mutual fund schemes based on the asset class.
Equity funds invest primarily in stocks and related instruments and are known to offer potentially high returns along with high risk. These funds are generally recommended for investors with a long-term investment horizon of at least 3-5 years. Equity funds can also be classified based on the size of the companies they invest in.
Read more about What are Equity Funds
Debt funds invest in fixed-income securities such as government bonds, company debentures, and other similar instruments. These funds are considered to be among the safest types of mutual funds and can be suitable for short-term as well as long-term investments. Like equity funds, debt funds also come in different types - their variations are based on the maturity period of the debt and money market instruments they invest in.
Read more about What are Debt Funds
Hybrid funds are investment funds that allocate their assets among multiple asset classes based on their investment objectives and other factors. There are different types of hybrid funds, including equity-oriented hybrid funds, debt-oriented funds, and arbitrage funds.
Read more about What are Hybrid Funds
Equity-oriented hybrid funds invest a minimum of 65% of their assets in equity and equity-related instruments and the rest in debt. For tax purposes, these funds are treated as equity funds.
Debt-oriented hybrid funds invest at least 60% of their assets in debt securities, and they are considered debt funds for tax purposes.
Arbitrage funds primarily invest in futures and options to generate returns, and they always have an equity exposure of over 65%. Despite this equity exposure, they are treated as equity funds for tax purposes.
Types of Mutual Funds in India Based on Investment Objectives
Mutual funds have various investment objectives, with some focusing on capital growth, fixed income, tax savings, and more. Additionally, there are different types of equity funds, including growth funds, liquid funds, income funds, and tax-saving funds.
Growth funds:
These funds aim to grow an investor's capital in the long run. They are typically equity funds that offer higher returns potential (but little dividends) but come with higher risks. They involve stocks of companies that focus on reinvesting profits into operations and R&D. These funds are not recommended for risk-averse investors, especially those looking to invest for a shorter period.
Liquid funds:
These funds invest in instruments with short to very-short maturities (typically not exceeding 91 days) to ensure liquidity. They are low-risk and ideal for short-term investments. However, lower risk also means lower return potential.
Income funds:
If an investor's goal is regular income from their mutual fund investment, income funds can be an excellent option. These funds invest mainly in debentures and bonds with fixed maturities, providing fixed income or dividends.
Tax-Saving funds:
Also known as Equity Linked Savings Scheme (ELSS), these funds are eligible for a tax deduction of up to Rs. 1.5 lakhs in a financial year. Tax-saving funds are equity-oriented diversified funds, with more than 65% of the portfolio invested in equity.
Different Types of Mutual Funds Based on Structure
Mutual funds can be classified based on their structure, and there are three types of funds: open-ended, close-ended, and interval funds.
Open-ended funds are available for purchase and sale throughout the year. The fund managers aim to invest in instruments with high return potential. The buying and selling of open-ended funds are based on the current Net Asset Value (NAV) of the fund.
Close-ended funds, on the other hand, can only be bought during the New Fund Offer (NFO) period and redeemed after a fixed maturity period. These funds are also listed on stock exchanges, but their liquidity is usually low.
Interval funds combine the features of both open-ended and close-ended funds. The fund house opens the fund for buying and selling at intervals. During the interval period, the fund houses generally repurchase the units from investors who want to exit.
The Right Mutual Fund For Your Investment Goals
With so many mutual funds available in India, selecting the right one for your investment goals can be overwhelming. Here are some tips to help you choose the right mutual fund for yourself that align with your goals, horizon and risk tolerance:
Determine your investment goals:
Before investing in a mutual fund, you should determine your investment goals. Do you want to invest in short-term or long-term? Are you looking for capital appreciation or regular income? Your investment goals will help you select the right mutual fund.
Understand the different types of mutual funds:
You should understand the structure, fees, portfolio, risk and return profile of each type of mutual fund before making an investment decision.
Assess the fund's past performance:
While past performance is not a guarantee of future returns, it can give you an idea of how the fund has performed in the past. Look for funds that have consistently outperformed their benchmark over a long period of time.
Check the fund manager's track record:
The fund manager plays a crucial role in the performance of the mutual fund. Look for a fund manager who has a track record of generating good returns for investors.
Look at the expense ratio:
Mutual funds charge a fee for managing your money, which is known as the expense ratio. Look for funds with a lower expense ratio, as it will reduce the impact of fees on your returns.
Consider the risk factor:
Every mutual fund comes with a certain level of risk. Consider the risk associated with the mutual fund and see if it matches your risk profile.
Read the scheme document:
The scheme document contains all the essential information about the mutual fund, including the investment objective, risk factors, fees, and expenses. Read the scheme document carefully before making an investment decision.
By doing your due diligence and selecting the right mutual fund, you can grow your wealth over time and achieve your investment goals.
