Mutual funds are the trickiest part when it comes to an investment. There are many types of funds which makes an investor confused to decide which one suits him better. Although, through this blog we are trying to make you all understand that how the mutual fund is been categorize and why it’s selection is so easy to choose the right fund for you.
Mainly the mutual funds depends on the below factors which one should consider before investing:
1. Risk Appetite
2. Goal based Investment Style
3. Taxes or Loads
4. Expense Ratio
These all factor we will discussed in detail in our next blog on what to consider before investing in mutual funds.
So Let’s start with the different types of mutual funds, here I tried to categorize each fund based on its applications and risk involved which makes you understand it more clearly:
Schemes according to Maturity Period:
Every mutual fund scheme is divided on the basis of the maturity, it is mostly classified as a Open-Ended fund Scheme or Close Ended Fund Schemes.
These types of funds/schemes are generally open from both of the ends. It means anytime an investor can invest particular amount of sum into it or can also be taken or sell out the invested sum. As such there is no maturity period assign to these schemes. We can also say this, these funds are liquid in nature which can be redeem or invested at any point of time.
These types of funds/schemes have maturity period assign to them for e.g 3 – 5 years. These funds are open for buying or subscribe in the stipulated time frame. Investor can sell off their funds/scheme through the stock exchange listed price. This is true in case of only equity related funds, in case of premature of the debt funds investor need to pay the penalty for the same.
Schemes according to Investment Objective:
Growth/Equity-related Funds –
- These types of funds invest in equities related schemes or in simple terms companies share listed in Stock Market.
- These funds is primarily for those investor who are looking for wealth creation or capital appreciation over the medium to long term.
- These types of funds have the potential to generate higher return and are best for long term investments.
- They are more risky in nature as it is totally depend on the equity related investments.
- These schemes provide different options to the investors like dividend option, growth
etc. and investor opt according to their need.
Income/Debt Oriented Funds-
- These invest in Fixed Income Securities, like Government Securities or Bonds, Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
- These fund’s aim is to provide regular and steady income to investors. These are relatively safer investments and are suitable for Income Generation.
- Examples would be Short Term bonds, Corporate Debt, Dynamic Bond, Gilt Funds,Liquid funds etc.
- These funds are less risky compared to equity schemes and have less opportunity for capital appreciation.
Balanced/Hybrid Funds –
- These types of funds have the combination of both Equities and Income Oriented, thus offering the best of both, Growth Potential as well as Income Generation.
- Examples would be Conservative Balanced Funds,Aggressive Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans etc.
- These are appropriate for investors looking for moderate growth.
Money Market or Liquid Funds-
- These funds invest in the short-term instruments like certificates of deposit, treasury bills, commercial paper and inter-bank call money, government securities, etc.
- The fluctuation in these funds are very less as compared to other types of funds.
- Investors looking for the high liquidity and moderate growth can opt for this fund.
- It’s good for the investor or individual to park their surplus money for the shorter period of time.
Index Funds –
- Index funds, as the name suggests, invest in an index. These funds are also equity linked and invest in stocks in the same proportion as in a particular index. Here, the index are such as BSE Sensitive index
(Sensex), NSE 50 index (Nifty).
- They also have the potential to generate higher return and are best for long term investments.
Mutual Funds categories from kotaksecurities.com
There are few more useful categories of the mutual funds as below:
Tax Saving Funds –
- These funds/schemes offered rebate under the Income Tax provision of 80C upto 1.5 lakhs.
- These schemes are growth oriented and invest pre-dominantly in equities.
- The schemes/funds falls under this category are known as Equity Linked Savings Schemes (ELSS), which have the lock-in period of 3 years. It means once you have invested the particular sum in these funds it can only be redeem after the period of 3 years.
Sector specific funds/schemes –
- These are the funds/schemes which invest in the securities based on the industries/sectors for e.g., Pharmaceuticals, Software, Consumer Goods, Petroleum stocks, Information Technology, Banks, etc.
- These funds are more risky as compared to any diversified equity related fund.
- Investor should check the industry performance on regular basis and must exit at the appropriate time.
- The return in these funds are higher as compared to equity oriented for shorter period of time till the particular sector/industry perform well.
Fund of Funds (FoF) scheme –
- These funds are provide the larger extent of diversification by investing in other mutual funds.
- It spreads the risk across greater space.
Exchange Traded Funds (ETFs) –
- These are mutual fund types where the investor need to purchase or sell at the stock exchange, as compared to other funds they cannot be buy from the AMC.
- ETFs therefore trade like stocks and experience and there is price fluctuations throughout the day as they are bought and sold. Buying and selling ETFs requires the investor to have demat and trading
- These funds include various companies listed in their portfolio and should consider as for long term advantage.
We try to include the most of the major mutual funds types for the new investor to take a first step in the investment process. This is as per the individual’s choice to opt for the funds or schemes as per their goal oriented decision. Each fund category have its own benefits, it’s up to us to get the best from the investment.
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Spend 6 years in learning Stocks & Mutual funds Investment. A traveler from soul, finance is passion, Investment is hobby.