Let’s explore the various types of mutual funds available in India.
What are Mutual Funds:
A mutual fund pools money from many investors to invest in a variety of assets like stocks and bonds. It’s managed by a professional, and each investor owns a share of the total fund, sharing in its gains and losses.
Mutual Funds can be categorized into 4 main categories:
- Investment Objective:
- Asset Class
- Investment structure
- Investment Focus
A) Investment objective
Types of Mutual Funds based on Investment objective:
1. Growth Mutual Funds:
Growth funds primarily invest in companies that are expected to grow rapidly and significantly in value, aiming to build wealth over the long term by selecting businesses that can become much more profitable and valuable in the future.
Important Features:
- Primarily targets small- and mid-capitalization stocks.
- Exhibits higher volatility compared to balanced or income funds.
- Recommended to maintain a long-term investing horizon of over 5 years.
2. Income Mutual Funds:
Income funds focus on investing in things like bonds, debentures, and government securities to regularly provide investors with earnings. These funds prioritize keeping the invested money safe and ensuring stable returns.
Important Features:
- The portfolio mainly consists of debt instruments.
- Regular income from interest and dividends.
- Lower risk compared to equity-focused funds.
3. Balanced Mutual Funds:
Balanced funds, also known as hybrid funds, invest in both bonds (debt) and stocks (equity) to provide investors with both growth and regular income. The way these funds divide investments between debt and equity depends on the fund manager’s strategy and current market conditions.
Important Features:
- They typically invest in a mix of debt and equity.
- Suitable for investors who want both regular income and growth in their investment value.
- Offers the advantage of diversification by investing across different types of assets.
4. Tax Saving Mutual Funds :
Tax-saving funds are types of mutual funds that offer tax benefits under Section 80C of the Income Tax Act, such as Equity Linked Savings Schemes (ELSS) in India. These funds, which primarily invest in stocks, come with a lock-in period.
Important Features:
- Investments are tax-deductible up to a specified limit.
- Often, a substantial portion is invested in stocks for the purpose of long-term capital growth.
- Among tax-saving investments under Section 80C, the minimum lock-in period is three years.
5. Aggressive Growth Funds:
Aggressive growth funds aim to greatly increase their value by mainly investing in stocks of companies with high growth potential. Since these funds invest in the stock market, they usually come with higher risk.
Important Features:
- Mainly invest in growth-focused stocks, which can be more volatile.
- Focus on long-term growth rather than consistent income.
- There’s potential for bigger profits, but also higher risk due to stock market fluctuations.
B) Asset Class:
Types of Mutual Funds based on Asset Class:
1. Equity Funds:
Equity funds primarily invest in company stocks. Their goal is to achieve long-term financial growth by benefiting from the growth of the companies they invest in.
Important Features:
- Focuses on investing in equities of publicly traded companies.
- Presents potential for greater returns, but comes with increased risk and volatility.
- Includes various types of funds such as large-cap, mid-cap, small-cap, and sector-specific funds.
2. Debt Funds:
Debt funds invest in fixed-income options like corporate bonds, treasury bills, and government securities. Their main aims are to keep the invested money safe and provide a steady income.
Important Features:
- Focuses on investing in fixed-income assets that yield consistent interest income.
- Typically offers lower returns compared to stock funds, but with reduced risk.
- Available in various types, including gilt funds, income funds, ultra-short-term funds, and liquid funds, depending on the credit quality and maturity of the securities involved.
3. Money Market Funds:
Money market funds invest in safe, short-term options like certificates of deposit, commercial papers, and treasury bills. These funds focus on keeping your money accessible and safe.
Important Features:
- Puts money into short-term, easily accessible, low-risk investments.
- Aims to provide small gains while keeping the invested money safe.
- Ideal for short-term savings or holding extra money.
4. Hybrid Funds:
Balanced funds, also known as hybrid funds, split investments between debt and stocks to provide a mix of steady income and growth. How the money is divided depends on the fund’s goals and market conditions.
Important Features:
- Mixes investments in debt (like bonds) and equity (like stocks) to lower risk and add variety.
- Offers a chance to earn money and grow the value of the investment.
- The balance of debt and equity investments can change or stay the same, depending on the fund’s strategy.
C) Investment Structure:
Types of Mutual Funds based on Investment Structure:
1. Open-Ended Fund:
Open-ended funds are types of collective investments that don’t have a fixed end date. They create and buy back their own units based on how many investors want to buy or sell, using the current net asset value (NAV). The size of the fund can increase or decrease as investors buy or sell units directly from the fund.
Important Features:
- Investors can buy or sell shares directly at the current value (NAV).
- The fund issues and redeems shares based on how many investors want to buy or sell.
- Investors can enter or leave the fund at any time, which makes it easy to access their money.
- The daily value of the fund’s shares is calculated based on the worth of the investments it holds.
2. Closed-ended funds:
Closed-ended funds issue a fixed number of shares in an initial public offering (IPO). After the IPO, investors can buy or sell these shares on the secondary market, and they are traded on stock exchanges like stocks. These funds have a predetermined maturity date, at which point the fund is liquidated and investors receive their share of the fund’s assets.
Important Features:
- Shares are bought and sold on stock exchanges based on how much people want to buy or sell them.
- The fund doesn’t always create new shares; it starts by raising money through an Initial Public Offering (IPO).
- The fund is managed for a set period until it reaches its end date.
- The fund’s net asset value (NAV) might be different from its market price because of things like investor feelings and market changes.
3. Interval Funds:
Interval funds mix features of both open-ended and closed-ended funds. Like closed-ended funds, they issue shares, but they also let investors buy back or sell their shares directly to the fund at set times, such as every three or six months. You can’t buy or sell shares outside of these scheduled times.
Important Features:
- Shares are sold during an offering and traded based on market demand.
- Instead of continuous cash-out options, it offers occasional chances to redeem shares.
- Offers a mix of stability and easy access to money.
- Investments are made in a variety of assets, managed by professional fund managers.
D) Investment Focus:
Types of Mutual Funds based on Investment Focus:
1. Sector Funds:
Mutual funds and ETFs known as sector funds mainly invest in companies from specific industries like energy, technology, healthcare, or finance. They concentrate their investments on particular sectors.
Important Features:
- Targets a specific industry or sector to closely track its performance.
- Mainly invests in companies within that chosen industry.
- The fund’s success is directly tied to how well the sector does.
- Provides the opportunity for higher gains when the sector is performing well.
2. Index Funds:
Index funds, which may be mutual funds or ETFs, aim to match the performance of a specific market index, such as the Nifty 50. Their aim is to copy both the composition and the results of the index they track.
Important Features:
- This portfolio gathers a variety of stocks that mimic a specific index.
- It tries to match the performance of this index, minus any small differences and costs.
- Managers generally incur lower costs to manage it than funds that are frequently adjusted.
- It provides broad exposure to the market and spreads investments across many companies in the index.
3. Exchange Traded Funds:
Exchange-traded funds (ETFs) resemble individual stocks in that stock exchanges trade them. They allow investors to buy or sell shares at market prices during the trading day. ETFs can follow different types of assets, sectors, or indexes.
Important Features:
- Investors can buy and sell (it) throughout the day on stock exchanges.
- Offers variety like mutual funds, allowing for investment in different markets or sectors.
- Managers generally incur lower costs when managing it than they do with funds that are frequently adjusted.
- Investors can adjust their investments anytime during market hours, similar to trading stocks.
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