What is Mutual Funds
Mutual funds are highly managed funds that collect money from investors and invest them in securities such as stocks, bonds, money market and in other assets and produce capital gains for the investors. Mutual funds are controlled and managed by expert fund managers.
Mutual Funds are registered with SEBI (Securities Exchange Board of India) and SEBI approve AMC (Asset Management Company) managing the fund.
Types of Mutual Funds
Open-Ended Funds: In open ended funds investor can purchase or redeem units through the year. All purchases and redemption of these funds units are done at existing NAVs. Investor can keep these funds as long as they want. There is no investment limits for these funds. Charges are high for these funds because of the active management. These funds are perfect investment for those who want investment with liquidity because they are not bound to any precise maturity periods. It means that investors can withdraw their funds at any time they want.
Close-Ended Funds: A close-ended fund has a defined maturity period. In close ended funds investor can redeem units only during the initial offer period. All purchases and redemption of these funds units are done at a specified maturity date.
Interval Funds: Interval funds have the character of open-ended and close-ended funds. They are opened for repurchase of stocks at different intervals during the fund tenure.
Asset Class Based
Equity Funds: These funds are invest in equity shares of companies. Equity funds provide high returns but with high risk. Investors invest in equity funds for long term capital gain. Equity fund invest 65 to 75% of its total fund in equity related securities.
Debt Funds: These funds are invest in debt instruments e.g. government bonds, debentures, fixed income assets etc. Debt funds are safe investments and provide fixed returns. Tax does not auto deduct and the investor is liable to pay the tax by himself. These are low risk stable return funds.
Money Market Funds: These are liquid funds and invest in short term instruments e.g. Certificates of Deposit, Commercial Paper, and Treasury Bills for less than 91 days. These are safe investments for immediate but reasonable returns.
Balanced or Hybrid Funds: These funds invest in both equities and debt instruments. These funds provide stable, balanced return and growth. Proportion of equity and debt are ups and down some times equity is higher than debt while other time it is the other way round.
Based On Investment Objective
Growth Funds: These are high risky funds with high returns; in this fund money is invested in equity securities for long term capital gain.
Income Funds: These are safe funds, in this fund money is invested in money market instruments e.g. bonds, debentures etc. For providing capital security or protection and regular income to investors.
Liquid Funds: These are liquid funds and in this money is invested in short-term instruments e.g. CPs, T-Bills, etc. For providing liquidity. They are low risk and moderate return funds and perfect for short term investors.
Tax-Saving Funds (ELSS): These are high risky funds with high returns; in this fund money is invested in equity securities for long term capital gain. Investments are tax deducted under this fund.
Capital Protection Funds: These are like balanced funds where funds are invested in fixed income instruments and equity markets for balance or stable income with capital protection.
Fixed Maturity Funds: In these fund maturity date is fixed and funds are invested in debt and money market instruments.
Pension Funds: Pension funds are invested for very long term goal. These funds are invested in equities and debt markets where equities provide higher returns with high risk and debt markets provide lower but stable returns.
Mutual Funds Based On Specialty
Index Funds: These funds invest in instruments of a particular index. Risk involve in these funds depends on nature of that Index.
Fund of Funds: These funds invest in other mutual funds. These are also called multi manager Funds. These investments are quite safe.
Emerging Market Funds: These funds invest in developing countries that confirm good projection for the future. They have higher risk due to vibrant political and economic situations existing in the country.
International Funds: These are also known as foreign funds and offer investments in companies located in other parts of the world. These companies could also be located in emerging economies. The only companies that won’t be invested in will be those located in the investor’s own country.
Global Funds: These funds invest in any company of any part of the world. Global funds differ from international or foreign funds because these funds investments can be done in the investor’s own country.
Real Estate Funds: These funds invest in real estate and loan providing companies and investment can be made in Real Estate Company at any stage.
Commodity Focused Stock Funds: These funds invest in companies those are working in the commodities market, e.g. mining companies etc.
Market Neutral Funds: These funds are called neutral because directly they don’t invest in the markets. They invest in money market instruments like ETFs, treasury bills, securities and try to make stable growth.
Inverse/Leveraged Funds: These are like traditional mutual funds. These are inverse funds and make profit when market fall and make losses when markets do well. These are highly risky but give high rewards.
Asset Allocation Funds: These funds divided in two parts, target date fund and the target allocation funds. In these funds, the portfolio managers allocate assets in various instruments like bonds and equity to achieve results.
Gift Funds: These funds are invested in government securities for a long term. They are almost risk free and the ideal investment for the investor who don’t want to take risks.
Exchange Traded Funds: These funds are mix of open and close ended mutual funds, and these are exchange traded funds. These funds offer a lot of liquidity. They have lower service charges associated with them.
Mutual Funds Based On Risk
Low Risk: These are low risk mutual funds where investors do not want to take a risk with their money. In this type of fund investors invest in debt market for long term investments. These are low risk low profit funds.
Medium Risk: These are medium risk mutual funds for the investors. These are suitable for those investors who can take some risk and make higher returns. These are wealth creator funds.
High Risk: These are high risk mutual funds where investors are ready to take a risk with their money. These funds build investors wealth e.g. Inverse mutual funds. With these funds risk and rewards are high.
Equity Funds (High-Risk With High-Return)
- Large-cap funds
- Mid-cap funds
- Small-cap funds
- growth funds
- Value funds
- Dividend yield funds
- Index funds
- Diversified equity funds
- Sectorial funds
Debt Funds (Medium Risk, Fixed-Income Funds)
- Income Funds
- Gilt Funds
- Dynamic Bond Funds
- Liquid Funds
- Cash Funds or Treasury Management Funds
- Floating Rate Funds
- Short-Term and Medium-Term Income Funds
- Corporate Bond Funds
- Fixed Maturity Plans (FMPs) – close ended