If there were one or two types of mutual funds to choose from, wouldn’t it have been easier? Luckily, there isn’t. You might be wondering; why ‘luckily,’ because though you would be confused on the type of mutual fund to choose, you can analyze and select based on a customized financial need. More like, if you ever wanted an income every month, you could choose funds with dividends, and if you are ready to risk everything and gain big – you can choose highly volatile funds. So, here are all of the types of mutual funds in the market.
1) Mutual Funds Based on Asset Class
a) Equity Funds
Equity funds, which primarily invest in stocks, are sometimes known as stock funds. They invest the money collected from numerous investors from various backgrounds in shares/stocks of various companies. The gains and losses connected with these funds are purely determined by how the invested shares perform in the stock market.
Furthermore, equity funds have the potential to earn considerable long-term gains. As a result, the risk associated with these funds is also significantly larger.
b) Money Market Funds
In the stock market, investors trade stocks. Similarly, investors invest in the money market, often known as the capital market or cash market. It is operated by the government in collaboration with banks, financial institutions, and other organizations through issuing money market securities such as bonds, T-bills, dated securities, and certificates of deposit, among others.
The fund manager invests your money and pays out monthly dividends in exchange. Choosing a short-term plan (no more than 13 months) can significantly reduce the risk of investment in such funds. Through this, you can find some of the best dividend mutual funds and earn a steady income while still invested.
c) Debt Funds
Debt funds generally invest in fixed-income securities including bonds, securities, and treasury bills. Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds, and Monthly Income Plans are some of the fixed income instruments they invest in. Because the investments have a fixed interest rate and maturity date, they can be an excellent choice for passive investors seeking consistent income with little risk.
d) Hybrid Funds
As the name implies, hybrid funds are an optimal blend of bonds and equities, spanning the gap between equity and debt funds. The ratio may be variable or constant. In a nutshell, it combines the best of two mutual funds by distributing, say, 60% of assets in stocks and 40% in bonds, or vice versa.
Hybrid funds are appropriate for investors who choose to take more risks for the advantage of ‘debt plus returns’ rather than adhere to lower but steady income schemes.
2) Investment Oriented Mutual Funds
a) Liquid Funds
Liquid funds, like income funds, fall within the debt fund category because they invest in debt instruments and money market funds with maturities of up to 91 days. The highest amount that can be invested is Rs 10 lakh. The method through which the Net Asset Value is computed distinguishes liquid funds from other debt funds.
The NAV of liquid funds is calculated for 365 days (including Sundays), whereas the NAV of other funds is calculated for only business days.
b) Income Funds
Income funds are a type of debt mutual fund that invests in a variety of assets such as bonds, certificates of deposit, and securities. Income funds, which are managed by professional fund managers who keep the portfolio in sync with rate variations without jeopardizing the portfolio’s creditworthiness, have historically earned investors higher returns than deposits. They are best suited for risk-averse investors with a time horizon of 2-3 years.
c) Growth Funds
Growth funds typically invest a significant amount of their assets in stocks and growth sectors, making them ideal for investors (mainly Millennials) with excess cash to invest in riskier plans or who are enthusiastic about the scheme.
d) Aggressive Growth Funds
The Aggressive Growth Fund, which is slightly riskier to invest in, is meant to achieve large monetary gains. Despite being vulnerable to market volatility, one might choose a fund based on its beta (the metric used to compare the fund’s movement to that of the market).
e) Tax-Saving Funds
ELSS, or Equity Linked Saving Schemes, have risen in popularity among all types of investors over the years. They not only provide the benefit of wealth maximization while also allowing you to save on taxes, but they also have the shortest lock-in period of only three years.
They are known to earn non-taxed returns in the 14-16% area by investing mostly in stock (and associated products). These funds are ideal for salaried investors with a long investment horizon.
f) Capital Protected Funds
Capital Protection Funds serve the objective of safeguarding the investment while yielding relatively lower returns. The fund manager puts a portion of the money in bonds or CDs and the remainder in stocks.
Though the risk of loss is modest, it is recommended that you stay invested for at least three years (closed-ended) to protect your money, and the returns are taxable.
g) Pension Funds
Investing a percentage of your income in a pension fund over a lengthy period of time to protect your and your family’s financial security after retiring from regular employment can cover most scenarios.
Relying only on savings to get through your golden years is not advised because savings (no matter how large) are depleted.
h) Fixed Maturity Funds
Many investors choose to invest at the end of the fiscal year to take advantage of triple indexation, and so reduce their tax burden. If you are concerned about debt market trends and associated dangers, Fixed Maturity Plans (FMP) – which invest in bonds, securities, money market funds, and so on – give an excellent option. FMP, as a closed-ended plan, has a predetermined maturity time that can range from one month to five years (like FDs).
The fund management guarantees that the money is invested for the same period of time in order to harvest accrual interest at the time of FMP maturity.
3) Mutual Funds Based on Risks
a) Very Low-Risk Funds
Liquid funds and ultra-short-term funds (one month to one year) are noted for their low risk, and their returns are, predictably, low.
b) Low-Risk Funds
Investors are hesitant to engage in riskier funds in the case of a rupee depreciation or an unexpected national crisis. In such instances, fund managers advocate investing in one or more liquid, ultra-short-term, or arbitrage funds.
c) Medium-risk Funds
The risk factor is medium in this case since the fund manager invests a portion in debt and the remainder in equity funds. The NAV is not particularly volatile.
d) High-Risk Funds
High-risk mutual funds require active fund management and are appropriate for investors who have no risk aversion and are looking for large returns in the form of interest and dividends. Because they are vulnerable to market volatility, regular performance assessments are required.
While this is said in detail, there are some other categories that I will just mention in brief so you can get a summarized view of the rest.
4) Specialized Mutual Funds
- Sector Funds
- Index Funds
- Funds of Funds
- Emerging Market Funds
- International Funds
- Global Funds
- Real Estate Funds
- Commodity Focused Stock Funds
- Market Neutral Funds
- Leveraged Funds
- Gift Funds
- Asset Allocation Funds
- Interval Funds
Diving into the stock market means diving into an ocean of varied species of fish. But it ends up in your hands to choose the right kind of fund for yourself. Investors with a big risk appetite can choose funds that are highly volatile, and the ones who do not have that risk appetite can choose the low-risk funds. It keeps changing from one person’s preference and financial goals to another.