Mutual funds offer the most comprehensive, simple and flexible ways to make a diversified portfolio of investments. There are different types of mutual funds that provide totally different options that suit the investor’s diverse risk appetites. Let us understand the various types of mutual funds offered currently in the market that help you to make a good investment decision based on your needs & goals.
Broadly, any mutual fund can either invest in equities, debt or a mix of both (balanced fund). Further, they can be open-ended or close-ended mutual fund schemes.
- Open-ended funds
In an open-ended mutual fund, an investor will invest or enter and redeem or exit at any point in time. It doesn’t have a fixed maturity period. Exit changes can differ based on the fund.
- Close-ended funds
Close-ended mutual funds have a fixed maturity date. An investor can only invest or enter in these types of schemes during the initial period called the New Fund Offer or NFO period. His/her investment can automatically be redeemed on the maturity date. They are listed on the stock exchange(s).
Let’s take a look at the various varieties of equity and debt mutual funds offered in India:
- Equity Schemes:
These are one of the most popular mutual fund schemes. They allow investors to participate in the market. Though categorized as high risk, these schemes also have a high return potential within the long run. They’re ideal for investors in their prime earning stage, looking to create a portfolio that gives them superior returns over the long-term.
Equity funds can be any divided into 3 categories:
- Sector-specific funds (Invest in Particular Sector)
- Index funds (Focus on Sensex & Nifty)
- Tax saving funds (Provide Tax Rebate U/S 80c & Have 3 Years Locking)
- Money Market Funds or Liquid Funds:
These funds invest in short debt instruments, looking to offer a reasonable return to investors over a brief period of time. These funds are suitable for investors with a low risk appetite who are looking to park their surplus funds over a short period. They are like saving bank account funds. Any time with round and amount is transferred in stately.
- Fixed Income or Debt Mutual Funds:
These funds invest a majority of the money in debt – fixed income i.e. Fixed coupon bearing instruments like government securities, bonds, debentures, etc. They have a low-risk-low-return outlook and are ideal for investors with a low risk appetite looking at generating a steady income. However, they are subject to credit risk.
- Balanced funds:
As the name suggests, these are mutual fund schemes that divide their investments between equity and debt. The allocation could be different based on the fund. They are a lot of suitable investors who are looking for a combination of moderate returns with relatively low risk.
- Hybrid / Monthly income Plans (MIP):
These funds are almost like balanced funds but the proportion of equity assets is lesser compared to balanced funds. Hence, they’re also known as marginal equity funds. They are especially suitable for investors who are retired and want a regular income with comparatively low risk.
- Gilt funds:
These funds invest only in government securities. They are preferred by investors who are risk averse and want no credit risk associated with their investment. However, they’re subject to high interest rate risk.