What are the different types of mutual funds?

When you walk into a bike showroom, you will see a wide variety of bikes. There are Glamours, Bullets, and possibly even sports bikes such as the KTM and R15. Each bike in the showroom has a variety of different functions. A sports bike may be preferred by a youthful person, whereas a Glamour or Bullet may be preferred by a married person with a spouse or kids. Similarly, mutual funds in India come in a variety of forms. 

Did you know? 

There are two other ways to categorize different types of mutual funds: 

• Based on the underlying assets (equity, debt, gold, hybrid). 

• Based on the length of time till they reach maturity (open-ended and closed-ended funds). 

Each fund type is designed to help investors achieve a particular set of goals. Some of the most popular types of mutual funds available in India are listed below: 

Types of funds based on asset class: 

• Debt funds: The funds that invest in securities that generate fixed income like Treasury Bills, Corporate Bond, Commercial papers, Government Securities, and many other market instruments are called Debt Funds. All these market instruments have a pre-planned maturity date and rate of interest that the buyer can obtain on maturity and, therefore, it is also known as Fixed-Income Securities. As a result, debt securities are considered a low-risk investment choice. 

• Equity funds: As the name recommends, equity funds invest in the shares of different kinds of companies across sectors. The fund manager, who is managing your investment, always tries to offer great returns to you by spreading your investment across companies from different sectors or with various market capitalization. Generally, Equity Funds are known to offer better returns than term deposits or debt-based funds. There is a large amount of risk involved with these funds since their performance depends on various market conditions. But there is a good choice if you wish to invest for long-term goals such as retirement planning or purchasing a house because the level of risk comes down over time. 

• Hybrid funds: Have you ever wondered, what if you can have both an Equity fund and a Debt fund in your one investment? If your answer is ‘NO’, then we would like to introduce to you another type of Mutual Funds known as Hybrid Mutual Funds or Hybrid Funds. Hybrid Funds are those funds that invest in a mix of both Equity and Fixed-income (Debt) securities. Based upon the asset allocation between Equity and Debt. 

Hybrid funds are further defined into various sub-categories. 

• Open-ended mutual funds: It is secure to say that when people say mutual funds, they only mean Open-Ended mutual funds. Far from their Closed-Ended counterparts, the units of open-ended funds are not traded on any stock exchanges, be it BSE or NSE. Further, there is no limitation on the number of fund units that the fund can issue at once. Investors can purchase or redeem fund units from the fund house or asset management company on any business day at the current Net Asset Value or NAV of the scheme. The NAV is determined by the performance of underlying securities of that fund.No maturity period exists in this scheme. 
• Close-ended mutual funds: Close-ended funds come with a pre-planned maturity period. Investors can invest in the fund only when it is launched. They can withdraw or take out their money from the fund only at the time of maturity. These funds are listed similarly to the shares in the stock market. In case investors want to redeem their positions, they can sell the units in the Exchange where the funds are listed. However, this fund is not much liquid because the trade volume is lesser in this fund. 

Types of funds based on investment objective: 

Mutual funds are often referred to as quick and easy investment goals. 

• Growth funds: Capital appreciation is one of the main objectives of Growth funds. These funds keep a remarkable segment of the money in stocks. These funds can be comparatively riskier due to high equity exposure, and therefore, it is better to invest in them for the long-term period. But if you are close to your goal, for example, you may want to avoid these funds. 

• Income funds: As the name suggests, income funds try to grant investors a constant level of income. These are debt funds that invest the maximum in bonds, government securities, and deposit certificates, etc. They are affordable for different-term goals and investors with a lower risk appetite. 

• Liquid funds: It puts your money in short-term money market instruments like treasury bills, Certificate of Deposits (CDs), term deposits, commercial papers, and so on. Liquid funds help to safely park your surplus money for a few days to a few months or make an emergency fund. 

• Tax saving funds: It provides you with tax benefits under Section 80C of the Income Tax Act. When you invest in these funds, you can claim deductions to Rs 1.5 lakh each year. An example of Tax Saving Funds is ELSS (Equity Linked Saving Scheme). 

Read Next: Why Should You Invest in Mutual Funds?

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