A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds offer one of the most comprehensive, easy, and flexible ways to create a diversified portfolio of investments. They can be divided into various categories based on different investment objectives and risk appetites. Let us understand the different types of mutual funds available currently in the market to help you make an informed investment decision.
Schemes based on Structure
Open-Ended Scheme
An Open-Ended mutual fund does not have a fixed maturity period and they are open for purchase and redemption throughout the year. These funds allow the investor to stay invested for as long as they want and there are no limits on how much can be invested in the fund. These funds are ideal for those who want investment along with liquidity because they are not bound to specific maturity periods.
The majority of mutual funds in the Indian market are open-ended funds.
Close-Ended Scheme
A Close-Ended mutual fund has a fixed maturity date and an investor can only invest in these types of schemes during the initial period known as the NFO (New Fund Offer) period. These funds are listed on the stock exchange, however, they cannot be sold back to the mutual fund, instead, they need to be sold through the stock market.
Interval Funds
An Interval Fund has features of both Open-Ended and Close-Ended funds. These funds allow investors to trade units at predefined intervals. They may be traded on the stock exchange or maybe open for sale or redemption during pre-determined intervals.
Schemes based on Asset Class
Equity Funds
Equity Funds invest in equity stocks of companies. They are considered high-risk funds but also tend to provide high returns. They are ideal for investors in their prime earning stage, looking to build a portfolio that gives them superior returns over the long term.
Debt Funds
Debt funds invest in debt instruments such as corporate bonds, government bonds, and other fixed-income assets. They are considered to be safer than equity funds and provide fixed returns.
Hybrid Funds
Hybrid funds invest in a mix of asset classes. In some funds, the proportion of equity investments is higher while in some the proportion of debt investments is higher. This way the risks are balanced out. They provide lower returns than equity funds but also have lower risks hence they are appropriate for investors who want higher returns than debt funds and have some risk appetite.
Schemes based on Investment Objectives
Growth Funds
Growth funds invest primarily in equity stocks and have the purpose of providing capital appreciation. Hence they are considered to be risky and are ideal for investors who are planning to stay invested for the long term.
Income Funds
Income funds primarily invest in fixed income instruments such as government and corporate bonds with the aim of providing regular income and capital protection.
Liquid Funds
Liquid funds primarily invest in short-term or ultra-short-term instruments with the primary purpose of providing liquidity to their investors.
Tax-Saving Funds (ELSS)
ELSS funds primarily invest in equity stocks and investments made in these funds are eligible for income tax deductions.
Schemes based on Speciality
Index Funds
Index funds invest in instruments that follow a particular index on the stock exchange so as to mirror the returns of the index. These funds usually have lower expense ratios than equity funds as they are not actively managed.
Sector Funds
Sector funds invest in a particular sector of the market and the returns are similar to the performance of the sector. The risks involved in these schemes depend on the sector chosen.
Fund of Funds
Fund of Funds invests in other mutual funds in the market and returns are tied to the performance of the funds where the investment is made.
Exchange-Traded Funds
Exchange-Traded funds are a mix of both open-ended and close-ended funds and are traded on the stock exchange. They have lower expense ratios as they are passively managed. Also, they can provide high liquidity to their investors.
Real Estate Funds
Real Estate funds predominantly invest in securities that are provided by companies that invest in real estate projects.
Inverse Funds
Inverse funds primarily invest in equity stocks and are designed to profit from a decline in the value of an underlying benchmark
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