Types of mutual funds: considering investments in mutual funds? It is therefore of the greatest priority to consider the different forms of mutual funds and the advantages they provide. The types of mutual funds may be categorized on the basis of the following criteria.
Mutual Fund are classified based on-
- Asset Class
- Investment Goals
Based on Asset Class
Equity Funds –
As the name says Equity funds are those funds that are invested in stocks. They invest fund pooled from multiple individuals from a range of backgrounds into shares/shares of different firms. The profits and losses involved with this capital depend entirely on the success of the invested shares (price hikes or price drops) on the stock exchange. In comparison, capital funds have the ability to produce large returns over a period of time. Thus, the risk involved with all these investments often appears to be relatively higher.
Must read – Income tax blog
Debt Funds –
Debt funds invest are usually made on the fixed income instruments like shares, securities and treasury bills. They hold a wide range of fixed income securities like fixed maturity plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, and several others. As investments arrive with a set mortgage rate and maturity period, passive investors aiming for a stable paycheck with reduced losses could be a fantastic choice.
Money Market Funds –
Investors are trading securities on the stock market. Similarly, funds often participate in the financial markets, also recognized as the capital market or the cash market. The Government manages it in collaboration with banks, financial institutions as well as other companies by selling money market instruments such as shares, T-bills, dated securities and deposit certificates, among others. The investment manager spends the funds and sends out monthly returns in return. Choosing a short-term plan (not longer than 13 months) will substantially minimize the cost of investment in these funds.
As the title implies, hybrid funds (Balanced Funds) are the best combination of shares and stocks, thus merging the difference between equity and debt funds. The ratio could be either variable or constant. In brief, the best of the 2 mutual funds is to distribute, say, 60% of the investments in the stocks and the balance in the securities or vice versa. Hybrid funds are ideal for borrowers seeking to take further chances for the benefit of ‘debt plus dividends’ instead of holding to lower yet stable income schemes.
Based on Structure
Mutual funds are often classified on the basis of various characteristics (like risk profile, asset class, etc.). The structural grouping – open-ended funds, closed-ended funds and interval funds – is reasonably broad, and the distinction relies largely on the flexibility to buy and sell individual mutual fund units.
Open-ended funds don’t really have any specific limitation, such as with a specific time or the number of units that may be exchanged. These investments encourage investors to exchange securities at their preference and leave as needed by the prevailing NAV (Net Asset Value). This is the only explanation for why unit capital is constantly shifting with fresh entries and exits. An open-ended investment may also plan to avoid investing in new investors if they really do not wish to do just that (or cannot manage significant funds).
The unit capital to be invested in closed-ended investments is predefined. Indicating that the investment firm cannot sell higher than the agreed amount of shares Some funds even arrive with New Fund Offer (NFO) period; in which there is the last date to purchase units. NFOs arrive with such a pre-defined maturity span, with fund managers available to every size of the fund. SEBI has now required that investors be offered the choice of either repurchase or display the funds on the stock exchanges to exit the schemes.
Interval funds have characteristics of both open and closed-ended funds. These funds are available for purchasing or redemption only at particular times (decided by the fund house) and are locked for the most of the session Also, no investments would be allowed for at least 2 years. These funds are ideal for investors seeking to save every lump sum for a short-term financial target, say, in 3-12 months.
Based on Investment Goals
Growth funds typically assign a significant portion of the securities and growth markets, ideal for investors (mainly Millennials) that have an excess of unused capital to be allocated in riskier plans (but with potentially good returns) or who are optimistic about the scheme.
Income funds contribute to the debt mutual funds family, which disperse their money in a combination of shares, certificates of deposits and stocks, among many others. Held by professional investment managers who hold the investments in line with rate fluctuations without sacrificing the creditworthiness of the portfolio, income funds has traditionally given investors greater returns than deposits. They are perfectly suited for risk-averse buyers with a 2-3 year timeframe.
Like income funds, liquid funds mostly refer to the debt investment group, since they participate in debt securities and the money market for a period of up to 91 days. The highest amount permitted to invest is ₹10 lakh. The way the Net Asset Value is measured is a characteristic that separates liquid funds from several other debt funds. The NAV of liquid funds is measured for 365 days (which include Sundays) and for other, only business days are counted.
ELSS or Equity Linked Saving Scheme has become the most preferred investment option across all groups of investors. Not only would they deliver the value of asset maximization while helping you to save on taxation, but they also arrive with the shortest lock-in duration of just 3 years. Investing primarily in equity (and associated products) is considered to produce non-taxed returns in the range of 14-16%. These investments are ideally designed for salaried owners with a long-term investment horizon.
Aggressive Growth Funds
Partially on the higher risk path, while deciding where to invest, the Aggressive Growth Fund is structured to achieve rapid monetary returns. Although vulnerable to market fluctuations, the investment may be decided on the basis of the beta (the instrument used to gauge the movement of the investment in relation to the market). For eg, if the company offers a beta of 1, the aggressive growth fund would represent a higher beta, say, 1.10 or greater.
Capital Protection Funds
If the objective is to shield the principal, the Capital Protection Funds perform the task while receiving comparatively lower returns (12% at best). The fund manager spends a majority of the money in shares or certificates of deposits and the remainder in equity. While the risk of incurring any losses is very poor, it is advisable that you remain invested for at least 3 years in order to protect your assets, and that dividends are also taxable.
Fixed Maturity Funds
Often buyers chose to spend at the ends of the FY in order to gain the benefit of the triple indexation, thus reducing the tax load. If they are concerned with debt market trends and associated threats, Fixed Maturity Plans (FMPs) – that invest in bonds, securities, the money market, etc. – are a good option As a close-ended strategy, the FMP runs on a set duration that could vary from 1 month to 5 years (like FDs). The fund manager guarantees that the money is committed to an investment of the same period in order to gain the accumulated interest at the point of FMP maturity.
Based on Risk
Very Low-Risk Funds
Liquid funds are investments held for 1 month to 1 year and usually have low risk. As less risk comes with fewer returns, you can expect a return of 6% at best. Investors prefer this to achieve their short-term investment needs and to preserve their money secure through these assets.
In the case of a rupee depreciation or an unpredictable regional situation, investors are uncertain about investments in riskier funds. In those situations, investment managers consider placing money in either one or a mixture of liquid, ultra-short-term or arbitration funds. Returns may range between 6 and 8%, but buyers are free to adjust as valuations get more predictable.
The risk element here is moderate as the fund manager spends a section in debt and the remainder in equity funds. The NAV is really not that unpredictable, and the average returns maybe 9-12%.
Appropriate for investors who have no risk aversion and are looking for higher gains in the form of interest and dividends, high-risk mutual funds require aggressive fund management. Daily performance assessments are essential since they are vulnerable to market fluctuations. You should expect 15% returns, but most high-risk funds typically have up to 20% returns.