Hey, you there! Do you know what the Mutual Funds are? If yes, then it is time for you to understand what type of mutual funds are available to you. It is important since it will allow you to choose the best option and eventually make it possible for you to diversify. There are various best mutual funds to invest in based on the maturity period and investment objectives. Let us talk about the various types of mutual funds:
1. Mutual Funds Based on Asset Class
Equity mutual funds invest in securities and hence go by the name of equity funds as well. They invest the money pooled by various investors of different backgrounds in the share/shares of different companies. The gains and losses associated with these types of mutual funds depend solely on the performance of the invested shares (price hikes or price drops) on the stock market. In addition, capital funds can produce large returns over a period. Consequently, the risk associated with these mutual funds often appears to be relatively higher.
Debt Mutual Funds
Debt mutual funds invest mainly in fixed income instruments such as shares, instruments, and treasury bills. These types of mutual funds invest in a range of fixed income instruments such as fixed maturity plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds, and Monthly Income Plans, among others. As investment comes with a set interest rate and maturity date, passive investors looking for daily income (interest and capital appreciation) with reduced risks can be a great choice.
Hybrid Mutual Funds
The hybrid mutual funds (Balanced Funds) are, as its name indicates, an excellent blend of bonds and stocks, bridging the difference between equity and debt funds. The ratio can either be variable or fixed. In short, the better of the two mutual funds is to distribute, say, 60 percent of the assets in the stocks and the rest in the bonds or vice versa. These types of funds are the best mutual funds to invest in for investors seeking to take more chances for the benefit of ‘debt plus returns’ rather than sticking to lower yet steady income schemes.
Money Market Funds
Investors trade stocks in the stock market. Similarly, investors often participate in the money market, often known as the stock market or the cash market. The Government manages it along with governments, banks, and other bodies by issuing currency market instruments, such as bonds, T-bills, dated securities, and deposit certificates, among others. The mutual funds’ manager invests the money and pays dividends on a regular basis. A short-term strategy will decrease the risk of investment in these types of mutual funds substantially (not more than 13 months).
2. Mutual Funds Based on Structure
Mutual funds are often graded according to different characteristics (e.g. risk profile, asset class, etc.). The structural classification is broad: open-ended funds, closed-ended funds, and interval funds, and the difference depends primarily on the versatility of buying and selling individual units of mutual funds.
Open-Ended Mutual Funds
Open-ended mutual funds, such as a specific time or the number of units that can be exchanged, do not have any limitations. These types of mutual funds allow investors to trade funds at their convenience and exit when needed by the prevailing NAV (Net Asset Value). This is the only explanation of why unit capital is constantly shifting with new entries and exits. An open-ended mutual fund can also decide to avoid accepting new investors if they do not want (or cannot handle large funds) to do so.
Closed-Ended Mutual Funds
The unit capital to be invested in these types of mutual funds is predefined. In other terms, more than the pre-agreed number of units will not be sold by the fund firm. Some funds also have a New Fund Offer (NFO) duration, in which time is set for the purchase of units. NFOs have a predefined maturity tenure, with fund managers eligible for all sizes of funds. SEBI has now ordered investors to either buy back or list the funds in stock exchanges to withdraw the schemes.
Interval Mutual Funds
Interval mutual funds have both open and closed-ended fund features. These types of mutual funds are available only at certain interims (decided by the fund house) to buy or reimbursement and are closed the remaining period. Furthermore, for at least two years no transactions are allowed. These mutual funds fit investors who wish, in 3 to 12 months, to save a lump sum for a short-term financial objective.
3. Mutual Funds Based on Investment Goal
These types of mutual funds are part of the debt fund family which distributes their money through a combination of bonds, deposit certificates, and securities, among other things. Connected with rate variations without sacrificing the creditability of the portfolio, professional mutual fund managers have typically earned better returns for investors than deposits. They are ideally suited for 2-3 years of risk-averse investors.
Growth funds, these types of mutual funds are typically assigned a large share to investors (mostly Millennials) who have idle cash surpluses, but who have high returns or are optimistic for the scheme, in the shares or growth sectors.
Like income mutual funds, these types of mutual funds also belong to the group of debt funds as they are investing for up to 91 days in debt instruments and capital markets. Rs 10 lakh is the largest amount permitted to invest. The way Net Asset Value is measured is a feature that differentiates between liquid funds and other debt funds. The NAV is measured for 365 days (including on Sundays), while for others it is measured for only working days.
Over the years, the ELSS or Equity-linked saving system has risen to all investor groups. These types of mutual funds deliver not only the advantage of optimizing income but also the lowest lock-in time for only three years thus enabling you to save taxes. Mainly investing in equity (and related products) they achieve 14-16 percent non-taxed returns. These funds are most appropriate for long-term investment horizons working investors.
Aggressive Growth Funds
The aggressive Growth Fund is built to make sharp monetary returns marginally on the riskier side of investing. Although prone to fluctuations on the market, the fund could be determined according to the beta (a metric to calculate the movement of the fund relative to the market).
Capital Protection Funds
If it is a priority to protect the principal, these types of mutual funds are structured to receive comparatively lower returns (12% at best). A proportion of the funds is invested in bonds or deposit certificates and the remainder in equities. Although there is a very low risk of loss, it is best to remain invested in these types of mutual funds for at least three years in order to keep the money safe, and the returns are taxable.
Fixed Maturity Funds
Many investors chose to invest in different types of mutual funds in the FY, thus reducing the tax burden, to the benefit of three-fold indexation. If the developments and associated threats in the debt market are uncomfortable, FMPs – investments in shares, stocks, currencies, etc. These types of mutual funds work in a close-ended schedule with a set maturity period of 1 to 5 years (like FDs). The fund manager ensures that the money is invested in the same tenure investments, so that accrual interest is earned as FMP matures.
If you put any of your earnings away from a selected type of pension mutual fund over a period of time to protect your financial future and your family after withdrawal, the majority of contingencies (such as emergency medical services or child wedding) will take care of. It is not recommended that you rely exclusively on savings to make your golden years as savings are spent (no matter how large). An example of this is EPF, but the banks, insurance companies, etc have a variety of lucrative schemes.
4. Mutual Funds Based on Risk
Very Low-Risk Funds
Liquid funds and short-term funds are well known for their low risk (one month to one year), and their returns are understandably low (6 percent at best). Investors choose to achieve their short-term financial targets and to protect their assets through these funds.
Low-Risk Mutual Funds
In the case of a sudden national crisis or rupee depreciation, investors are not sure if they are investing in riskier types of mutual funds. In such situations, fund managers are suggesting placing money in a liquid, ultra-short, or arbitrary cash mix. Returns could be 6-8%, but investors may move free when appraisals become stable.
Medium-risk Mutual Funds
The risk factor in these types of mutual funds is medium as the fund manager invests a share of the debt and the remainder of the equity. The NAV is not so unpredictable and maybe 9-12% for average returns.
High-Risk Mutual Funds
For investors with no risk avert, high-risk types of mutual funds require aggressive fund management to generate large returns through interest and dividends. Daily performance evaluations are compulsory since they are subject to fluctuations in the sector. 15% returns can be expected, but up to 20% usually are returned in most high-risk funds.
So, now you have got the knowledge about different types of mutual funds, I am sure you will make the best use of your money and invest in the most profitable mutual funds as per your resources.
Till then happy investing!