Types Of Mutual Funds

In the last decade, mutual funds have emerged as one of the most preferred and profitable investment avenues. The availability of different types and categories of mutual funds in the market make it a viable investment option for different types of investors with varied risk appetite.

Since investing in the market has its share of risks, individuals must select a mutual fund that matches their intent. To do so, they need to find out more about the different types of fund options available. Subsequently, they should weigh the accompanying pros and cons to make an informed decision.

Categories Of Mutual Funds – In A Nutshell

Before finding out about the different types of mutual funds, one should check out the categories they belong to. In a broader sense, there are 5 categories of mutual funds, and they include -

1. Mutual funds based on assets class
2. Mutual funds based on the structure
3. Specialised mutual funds
4. Mutual funds based on risk 
5. Mutual funds based on investment goals 

To gain a better idea about them and their effectiveness as an investment option, individuals need to become familiar with each type of fund under these categories.

Type Of Mutual Fund – Based On The Asset Class

Based on the asset class, they can be divided into 4 types. These pointers below offer a fair idea about them –

• Equity Funds:

This type of fund invests primarily in stocks of different companies. The performance of the underlying shares decides whether the fund will generate profit or accrue a loss. 

• Debt Funds:

These funds invest mostly in debt instruments like bonds, treasury bills, and securities. Usually, debt funds generate a fixed rate of return and come with a maturity date. Collectively, this makes the funds suitable for conservative investors or individuals who are averse to risks. 

• Hybrid Funds:

They are also known as balanced funds, and they serve as a bridge between debt funds and equity funds. The ratio of allocating resources between stocks and debt funds depends on the fund manager’s discretion and investor’s investment goal. Generally, they are considered suitable for individuals with a high-risk appetite. 

• Money Market Funds:

Primarily these are debt funds that are made available to companies for a term of 1 year. These funds invest in multiple market securities and are highly liquid. Money market funds include treasury bills, certificate of deposit or CD, repurchase agreements, commercial paper, etc., among others. 

Type Of Mutual Fund – Based On The Structure 

On the basis of structure, mutual funds are categorised as close-ended and open-ended ones. This table below walks us through the primary differences between the two –

Type Of Mutual Fund – Based On Risks

They can be divided into these three types based on risks –

• High-Risk Funds – These funds offer investors high returns in the form of dividend and interest. However, as the name suggests, they expose investors to high risk.

• Medium-Risk Funds – They comprise a mixture of both debt and equities, and therefore, the accompanying risk-reward factor is also low. 

• Low-Risk Funds – They expose investors to low risks. They are most suited for individuals who are unsure about taking risks related to investments. 

Type Of Mutual Fund – Based On Financial Goals

By factoring one’s financial goal, individuals can invest in any of these mutual funds in India –

• Growth Funds:

They are mostly directed towards growth sectors, rapidly expanding companies and shares that come with high risk-reward prospects. The primary objective of these funds is capital appreciation. Ideally, these investment options are popular among investors who wish to grow their investment profile.

• Income Funds:

They invest money into a variety of government securities, corporate bonds, high dividend-generating stocks, and certificate of deposits. The primary objective of income funds is to generate a steady flow of income for investors. 

• Tax-Saving Funds:

As the name suggests, the underlying goal of these funds is to facilitate tax savings. Equity Linked Saving Scheme or ELSS is among the most popular tax-saving mutual funds in India, among investors. While they enable wealth generation, they come with a stringent lock-in period. Tax-saving funds are ideal for salaried individuals or those who plan on building a retirement corpus over the years. 

• Liquid Funds:

Essentially, these are debt funds that park money into assets and securities, with a tenure of 91 days. They invest in financial instruments like – treasury bills, fixed maturity funds, and other debt securities. 

Other than these, pension funds, aggressive growth funds, capital protection funds, and fixed maturity funds are the other popular types in this category.

Besides these, there is one more category of mutual funds that is a one of a kind investment option – Specialised mutual fund. The most popular funds under this category include - fund of funds, index funds, sector funds, exchange-traded funds, and global market funds.

Nevertheless, while selecting the most suitable mutual funds in India, individuals should develop a well-rounded plan, and align their investments accordingly. Once they have chosen a mutual fund to invest in, they should make it a point to balance and rebalance their portfolio regularly to fine-tune the risk-reward ratio as per the market conditions.