Different Types of Mutual Funds

The Mutual Fund market in India is flooded with many “types of mutual funds” which makes it difficult to identify the right types of mutual funds and invest in it. This article will help explain the different types of Mutual Funds and its features. Once you identify the right type of mutual fund, you have to identify the good performing funds in that category and invest.

1.    Open-ended Mutual Fund

Open-ended Fund is available for purchase and repurchase on a continuous basis. They are not having a fixed maturity period. You can buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis.

2.    Close-ended Mutual Fund

Close-ended Fund is having a stipulated maturity period. The fund is open for subscription only for a limited period at the time of launch.  Investors can also invest in the scheme after the public issue through the stock exchanges where the units are listed. To ensure liquidity, some close-ended funds give the option of selling the units back to the fund on specified dates.

3.    Equity Mutual Funds

Equity Mutual Funds invest a major part of their corpus in equities. Such funds are risky compared to other funds. Equity Funds are good for investors having a long-term outlook. It has given better returns in the long term and is ideal for long-term goals. It is not good for funding short-term goals.

4.    Debt Mutual Funds

Debt Mutual Funds provides regular and steady income to investors. They invest in fixed income securities such as Bonds, Corporate Debentures, Government Securities and Money Market instruments. These funds are less risky compared to equity funds. They are not affected because of the volatility in equity market. If the interest rates fall, NAVs of such funds are likely to increase. This is because of the inverse relationship between the interest rate and the value of the bonds.

5.    Balanced Funds

Balanced Funds invest in a mix of equity and debt as mandated in the offer document. These are ideal for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. NAVs of such funds are likely to be less volatile compared to pure equity funds.

6.    Liquid Fund or Money Market Fund

These funds are meant for very short-term investments and provide easy liquidity, preservation of capital and moderate return. These schemes invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper, Call Money Market, Government Securities, etc. Returns on these schemes fluctuate much less compared to other funds.

7.    Gilt Funds

These funds invest in government securities, with no default risk. NAVs of these schemes fluctuate due to change in interest rates and other economic factors.

8.    Index Funds

The investment of Index Funds will be exactly as per the index it tracks like BSE Sensex, Nifty 50 etc. These schemes invest in the securities in the same proportion to the index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to tracking error. Index Funds will be charging less management fee from the investors.

Another version of Index Funds, which are traded on the stock exchanges are called Exchange Traded Funds.

9.    Sector Funds

These are funds which invest in the securities of only selected sectors (Banking, Pharma, IT, FMCG etc) as specified in the offer document. The returns in these funds are dependent on the performance of the respective sectors and are more risky compared to diversified funds.

10.  Tax Savings Mutual Funds

These funds offer tax rebates to the investors under section 80C of the Income Tax Act. Equity Linked Savings Schemes (ELSS) and Pension Schemes launched by the Mutual Funds also offer tax benefits. These schemes are equity-oriented and will be volatile in the short term.  Most plans come with a lock-in period of 3 years.

11.  Fund of Funds  (FOF)

Such funds invest in other funds of the same Fund House or other Mutual Funds. FOF scheme helps the investors to achieve greater diversification. It spreads risks across a greater universe. But management charges will be higher in such schemes.

Different types of Mutual Funds – which one will suit you?

Here, we have covered all the major types of Mutual Funds. It is not necessary that all funds will suit you. You have to list your financial goals and then select the best types of mutual funds to suit the goals. Within each type, you have to select better funds and invest for optimum results.

Mutual Funds are ideal for wealth creation. If you cannot do it yourself, get the services of a Certified Financial Planner. He will help you in this.