If you are one of those new investors planning to invest in equity mutual funds, terms like smallcap, hybrid, multicap etc will certainly leave you confused. Different types of mutual funds in India offer different possibilities. Mutual fund investment is not easy and hence before making your very first investment in mutual funds, it is important to know that these are categorized based on:
- Asset Class
- Investment Objective
It is also important to choose the right kind of fund for the investment and the choice needs to depend mainly on the investment goal. Let us in this article learn about the types of mutual funds that are categorized based on their structure, the asset class and the investment objectives.
Types of Mutual Funds in India Based on Structure
Open-Ended Funds: Open-ended funds are the funds where the units are open for purchase or for redemption throughout the year. These funds let the investors keep their investments for the term they wish and the purchases or the redemptions of the same are always done based on the existing NAVs. As these funds have no maturity date, these are ideal for those investors who wish to withdraw the funds at the time they need.
Close-Ended Funds: As the name suggests, close-ended funds can only be purchased at the time of the Initial Offer Period. Such units purchased can only be redeemed at the given maturity date. Many of these schemes are also listed on the stock exchanges to provide liquidity to the investor and hence can also be sold via the exchange at the existing share price.
Interval Funds: Interval funds have the features of both open ended and close ended funds and these are open for repurchase at different intervals during the mutual fund tenure. The fund management company can also make an offer during this time for repurchasing of the units from already existing fund holders, providing the investors with an option to offload any shares. These are often considered to be the best mutual funds to invest in.
Types of Mutual Funds in India Based on Asset
There are different types of mutual funds that are categorized based on the asset. They are,
Equity Funds: Equity funds are often considered to be high risk as these funds invest solely in equity stocks of various companies. As these are linked to the stock markets, they tend to provide high returns when the market sees an uptrend.
Money Market Funds: These funds make the investments in liquid instruments like CPs or T-Bills. These are safe and are ideal for those who are looking for moderate returns. These funds are also known as cash markets and investors need to keep a tab on the risks involved in terms of credit, interest and reinvestment.
Debt Funds: Debt funds invest in various debt instruments like government bonds or company debentures and are considered as a safe investment. Investors can expect fixed returns of debt funds and no tax is deducted at the source on the earnings.
Hybrid Funds: These are the funds which invest in mixed assets. Risk and returns get balanced well as the proportion of investments in equity and debt are well managed by the fund management company.
Types of Mutual Funds in India Based on Investment Objective
Investors can also choose mutual funds based on the investment objective. Some of the prominent ones are as follows:
Growth Funds: Under schemes like these, funds are invested in equity. Though these provide capital appreciation, they are considered risky for long-term investments.
Liquid Funds: Under this scheme, money is invested in short or very short term instruments as they provide the much-needed liquidity. These are low-risk investments and provide moderate returns within a short time.
Income Funds: These funds invest in fixed income instruments like bonds or debentures. These funds provide the investors with regular income and capital protection.
ELSS or Tax Saving Funds: These funds also invest mainly in equity shares and are high in risk. ELSS provides high returns on good performing funds but the investments made in ELSS also qualify for a tax deduction.
Pension Funds: Pension funds are ideal for investors with a long-term investment goal. These provide regular income to the investor around the time he/she is ready to get retired. The investments made in pension funds are mostly split across equities and debt, where debt interments balance the risk and equity provides good returns on the investment made. The returns obtained from such funds can be taken at once or also as a pension.
The above mentioned are various types of mutual funds investors can choose from. Remember that mutual funds always come with a risk involved- big or small. Hence, read all the policy documents well and choose the ideal fund based on your investment goals.