Types of Mutual Funds in India 

Mutual Funds

A mutual fund is a collection of funds from a number of individuals used for buying stocks, bonds, or other assets. A number of investors hold mutual funds, which are managed by experts. To put it another way, a mutual fund is a set of securities that are held by a number of investors and are overseen by a fund manager.

Understanding the Operation of Mutual Funds

When you invest in a mutual fund, you combine your funds with those of other investors. A fund manager who makes investments in financial assets like stocks, bonds, etc. manages the money that you and other investors have pooled together. Every day, the mutual fund is handled. Here is a flowchart showing how mutual funds operate:

Mutual Fund Types

As a productive investing channel, mutual funds have recently gained a lot of appeal. Your investment objective will determine the best sort of fund to use for your requirements.

The following is a list of the most popular mutual fund kinds in India:

• Equity Funds
• Debt Funds
• Money Market Funds
• Index Funds
• Balanced Fund
• Income Fund
• Fund of Funds
• Speciality Fund

The nation’s asset management firms provide a variety of additional fund kinds. In the sections below, we have divided the same into categories depending on structure, asset type, investing purpose, speciality, and risk.

Types of Mutual Funds by Structure

Open-Ended Funds:

These are funds whose shares are available for purchase or redemption at any time throughout the calendar year. The current NAV is used for all acquisitions and redemptions of these fund units. In essence, these funds will let investors continue investing for as long as they choose. The amount that may be invested in the fund is unrestricted. They also tend to be actively managed, which implies that a fund manager selects the locations for the placement of investments. Due to the active management, these funds also charge a fee, which may be larger than that of passively managed funds. They are the perfect investment for people who desire both investment and liquidity.

Closed-Ended Funds: 

These are financial products whose shares may only be bought during the first offer period. At a predetermined maturity date, units may be redeemed. These plans are frequently posted for trading on a stock market to offer liquidity. In contrast to open ended mutual funds, the units or stocks must be sold through the stock market at the current share price in order to be sold after being purchased.

Intervals Fund:

The characteristics of both open-ended and close-ended funds are present in interval funds, which are opened for share repurchases at certain points over the fund’s lifespan. During certain times, the fund management business makes an offer to repurchase units from current unitholders. Shares may be sold by unitholders in favour of the fund if they so choose.

Mutual fund types according to asset class

Equity funds 

These funds put money into company shares or equity. These funds are regarded as high-risk yet frequently offer substantial returns. Specialty funds for equity investments can be found in the banking, fast-moving consumer goods, and infrastructure sectors, to mention a few. They are associated with the markets and frequently. Some more types of Equity Funds are Large Cap Fund, Small Cap Fund, Mid Cap funds, Multi Cap Fund.  Eg HDFC Top 100 fund

Debt funds 

They make investments in fixed income securities such as corporate debentures, government bonds, and other debt instruments. They offer set returns and are regarded as secure investments. These funds do not withhold taxes from investors’ earnings at source, thus if such earnings exceed Rs. 10,000, the investor is responsible for covering the tax bill. Overnight Fund, Liquid Fund, Short Duration Fund, Dynamic FUnd are some of the types of Debt Fund. E.g. Nippon India Banking & PSU Debt Fund 

Money Market Funds: 

These are funds that invest in readily tradable securities like T-Bills and Commercial Paper. They are regarded as secure investments for people seeking quick but modest returns on spare cash. Cash markets are another name for money markets, and they have credit, reinvestment, and interest risk hazards. E.g. Nippon India Money Market Fund, Tata Money Market Fund

Balanced or Hybrid Mutual Funds:

A combination of asset types is invested in by balanced or hybrid funds. In some situations, the ratio of equity to debt is larger than in others, and vice versa. This creates a balance between risk and reward. Franklin India Balanced Fund-DP (G), for instance, invests 65% to 80% of its assets in stocks and the remaining 20% – 35% in the debt market, making it an example of a hybrid fund. This is true because the risk on the debt markets is smaller than on the stock markets. E.g. Parag Parikh conservative Hybrid Fund

Mutual fund types according to investing goals

Growth Funds: 

These plans invest money largely in equities stocks with the intention of generating capital growth. They are regarded as riskier funds that are best for individuals with a lengthy investment horizon. They are perfect for anyone searching for larger returns on their investments because they are risky funds. E.g Axis Growth Opportunities Fund

Income funds: 

These plans invest capital largely in fixed-income securities like bonds and debentures in order to safeguard investors’ capital and generate consistent returns.E.g. UTI Short Term Income Fund

Liquid funds: 

In these plans, money is typically invested in short- or extremely short-term securities, such as. T-Bills, CPs, and other instruments used to provide liquidity They are regarded as low risk investments with moderate returns that are best suited for individuals with short investment horizons.

Tax-Saving Funds (ELSS):

Investments in equity shares are the main focus of tax-saving funds (ELSS). Under the Income Tax Act, investments made in these funds are eligible for deductions. They are regarded as having high risk, but if the fund does well, they may also have substantial profits. E.g Nippon tax saver fund, tata india tax savings fund 

Fixed Maturity Funds: 

Fixed maturity funds invest assets in debt and money market instruments with maturities that are either the same as or earlier than the fund’s.

Capital Protection Funds: 

These use pools of money that are invested in both the stock and fixed income markets. This is done to make sure that the invested principal is safeguarded.

Pension Funds:

Mutual funds invested in with a very long-term objective are known as pension funds. They are mainly designed to offer consistent returns around the time the investor is prepared to retire. The assets in this type of fund might be split between stocks and debt markets, with equities acting as the riskier portion of the investment and offering larger returns, and debt markets balancing the risk by offering lower but consistent returns.

Mutual fund types according to specialty

Index funds:

Index funds invest in securities that correspond to a specific index on an exchange in order to mimic the movement and returns of the index, such as purchasing shares that correspond to the BSE Sensex. E.g. UTI Nifty 50 Index fund, HDFC Index S&P BSE Sensex Fund

Fund of funds: 

These are mutual funds that invest in other funds, and their returns are based on how well those target funds perform. Multi manager funds is another name for these funds. Because the funds that investors participate in really hold other funds beneath them, reducing risk from any one fund, these investments can be seen as quite secure. 

Sector funds:

They make investments in a certain market sector, such as real estate. Only those items or businesses related to the infrastructure sector are purchased by infrastructure funds. Returns are dependent on how well the selected sector performs. The level of risk associated with these plans varies on the industry. E.g tata digital india fund direct plan growth, nippon pharma fund, tata india consumer fund

International funds:

Foreign funds, usually referred to as international funds, provide investments in businesses with global reach. These businesses could be found in developing nations as well. Only businesses based in the investor’s own nation will not get investment.

Gilt Funds: 

Long-term investments in government securities are made via Gilt Funds, a type of mutual fund. They are essentially risk-free because they are invested in government securities, making them the ideal investment for individuals who don’t want to take chances. E.g. SBI Magnum Gilt Fund, Nipon India Guilt Securities Fund.

Exchange traded funds:

ETFs are mutual funds that combine open and closed ended investments and are traded on stock exchanges. These funds have a lot of liquidity and are passively managed rather than actively managed. Because they are passively controlled, they frequently have reduced related service charges (entry/exit load). E.g. SBI ETF Nifty, Nippon Nifty BeEs ETF

Conclusion

Choosing a mutual fund that best meets a customer’s unique investing goals can be challenging because there are so many different types of mutual funds on the market. The simplest piece of advise in that regard is to start by recognising your own wants. The following stage would be to determine your aim. 

Is the goal to accumulate money rapidly, gradually, or at a rapid rate? The risk you are willing to accept should be the final important factor to think about once that has been determined. The funds with the largest risks often give the best returns, according to widespread observation. Therefore, those funds should be chosen if you want returns rapidly and are prepared to face risks. Investing in a medium- or low-risk mutual fund is best if your goal is to develop money gradually.

Investors must carefully study their policy documents before investing since mutual funds always include some level of risk, no matter how little. Reading the contract would also be a good idea to make sure that the investors have a clear understanding of what they have purchased and all risks associated with it.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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