Different types of mutual fund are categorized based on the risk-appetite and goals of an investor.
An investor must consider answering these questions before investing in any Mutual Fund.
1) Are there any future goals related to the investment such as retirement, child’s marriage or education etc.? – If yes, then invest in high-risk mutual funds for long tenure to achieve the goal also mitigating inflation on the other hand.
2) Enjoy the tax benefits? – There is a special category of Mutual Funds known as ELSS (Equity Linked Saving Scheme) which are equity market based but enjoy the tax benefit under 80C of the income tax.
3) Risk appetite and Duration of investment? – Mutual funds are categorized on the basis of the Risk(Very Low, Low, Medium, High, Very High). Every fund owner shows the Riskometer against each fund. In general, one high-risk fund should be kept for the longer duration.
4) Investment or Emergency fund? – Keep high-risk fund for a longer duration as an investment. It can provide you with the handsome returns after the long period of time. The low-risk fund can be categorized under the Emergency funds which have the low rate of returns with high liquidity.
5) Need monthly Income or Dividend? – The mutual fund pays investors a monthly dividend or in the form of Income. Short/Long term fund is applicable to this category.
Below is the categorization of the funds based on the Risk Appetite, Duration and Investment Purpose: