Mutual Funds have been a popular investment option for individuals and families for many years now. Mutual funds offer a way to invest money in a variety of different assets, including stocks, bonds, and real estate.
There are several different types of mutual funds available, each with its own unique benefits and drawbacks. If you’re looking to invest in a mutual fund, there are several things you need to consider.
We will discuss the different types of mutual funds available in India as well as the benefits and drawbacks of each.
A mutual fund scheme could be classified into an open-ended or a closed-ended scheme based on the duration of its maturity.
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Open Ended Fund
An open-ended scheme or fund can be defined as one that is continually accessible for repurchase and subscription. They do not have a predetermined duration. Investors can purchase and sell units at Net Asset Value (NAV) associated prices reported on an ongoing basis. The main benefit of open-end plans is liquidity.
Close Ended Fund
A closed-ended scheme or fund has a predetermined maturity time, e.g., 3-5 years. The fund is available for subscription only for an agreed-upon period when the scheme is launched of the plan. Investors can subscribe to the scheme before the date of the New Fund Offering, and after that, they can purchase or sell parts of the scheme on exchanges on which they are traded.
To offer an exit option for investors, some closed-ended funds offer the option of selling the units back in the fund’s mutual fund by periodic repurchases at NAV equivalent prices.
SEBI Regulations stipulate that, at minimum, one of two routes to exit is available to an investor with a choice, i.e., either a repurchase facility or the listing at stock exchanges. The mutual fund’s schemes report NAV typically every week.
Type of Mutual Funds
- Equity Fund
- Debt Fund
- Index Fund
- Hybrid Fund
- ETF
Equity Mutual Fund
These funds invest primarily in stocks or equities of different companies. The most important goal is the creation of wealth and capital appreciation. They can bring in higher returns and are suitable for long-term investments.
Equity funds carry a higher risk due to stock market volatility but can offer higher returns over the long term
The schemes are based on the investment objectives.
These schemes can be closed-ended or open-ended, as mentioned earlier. They can be classified by mix in market Capitalization.
Large Cap Fund
According to SEBI’s guidelines, large-cap funds are required to invest at minimum the majority of all their capital in big caps. The remaining balance could be placed in midcap, small caps, and other investments. The funds invest across all industry sectors to diversify risk.
Large & Mid Cap Fund
As according to SEBI’s guidelines, the funds have to invest a minimum of 35 % of their assets in large-cap funds and a minimum of 35 % of their assets in midcap funds. The remaining assets may be put into stocks from every market segment and other assets. The funds invest across all industry sectors to help diversify risk.
Mid Cap Fund
According to SEBI’s directive, Midcap Funds must invest at a minimum of 65 % part of their portfolio in midcap stocks. The remaining amount can be invested in Large Caps, small-cap, and other securities. They invest across various industries to help diversify risk.
Small Cap Fund
As per the SEBI’s directive, Small-cap funds must invest at a minimum of 65% of the assets they hold in stocks of small caps. The remainder can be invested in Large Cap, Small Cap, and other assets. They invest across various industries to help diversify risk.
Sectorial Fund
These funds invest in a particular sector or industry, such as banking, technology, healthcare, or energy. Sector-specific funds are considered riskier than diversified funds because they are more exposed to changes in the sector’s performance
Debt Mutual Fund
These funds invest primarily in fixed-income securities like bonds, treasury bills, commercial papers, and money market instruments. Debt funds are considered less risky than equity funds but offer lower returns.
Index Fund
When creating the fund’s portfolio, the fund manager simply copies the index and makes an effort to keep the portfolio constantly in sync with its index.
Index funds aim to replicate the performance of the index they track, making them a passive investment option.
An index mutual fund tracks the performance of a specific index, such as the S&P BSE Sensex, Nifty 50, Bank Nifty Index, Small Cap Index Fund. This type of fund is good if you want to track an underlying asset rather than invest in individual stocks.
However, because these funds are based on stock indices, they may not offer the best returns over time.
3. Hybrid Fund: A hybrid fund is a type of mutual fund that combines the features of both Debt and equity mutual funds. A combination of debt and equity allows the fund to take advantage of the potential for higher returns on equity while still providing some protection against financial losses.
Hybrid funds can be categorized into aggressive hybrid funds, conservative hybrid funds, and balanced hybrid funds.
4. Balanced Funds: Balanced fund aims to maintain a balance between risky and safe investments, which can lead to higher returns on investment over time compared to more specialized funds. However, these types of funds are less common than specific investment options like equity or money market mutual funds and may be more difficult to find.
7. Fund of Funds: Instead of making direct investments in stocks, bonds, or other assets, a “fund of funds” (FOF) is a type of investment strategy that involves maintaining a portfolio of other investment funds. The majority of a FOF scheme’s investments are made in the units of another mutual fund scheme.
Exchange-traded funds (ETFs): ETFs are similar to mutual funds in that they pool money from multiple investors to invest in a portfolio of securities. However, they are traded on stock exchanges like individual stocks, making them more liquid and transparent
There is no single best type of mutual fund for everyone. Instead, it’s important to consider your investment goals and risk tolerance when selecting a mutual fund.
Some factors to consider include:
- -The investment type (equity, bond, money market)
- -Risk tolerance (higher risk funds may offer higher potential returns but also higher risk).
- -Growth prospects (stocks tend to outperform other types of investments over time, but they’re more volatile and can be risky).
- -Investment costs and fees (some funds charge high fees that eat into your return).
Once you have selected a mutual fund, it’s important to monitor its performance regularly and make sure your investment is diversified across different types of securities. Doing so can help minimize the risk of losing money on your investment, while also providing the potential for higher long-term returns.
Mutual funds can be an important part of any investment plan, but it’s important to carefully consider the risks involved before investing. It is important to compare different options and find one that fits your specific needs.
