Mutual funds are a type of investment that allows investors to pool their money together and invest in a variety of assets, such as stocks, bonds, and money market instruments. Mutual funds offer several advantages over other types of investments, such as diversification, professional management, and low costs. In this blog post, we will discuss the different categorizations of mutual funds based on risk, fund structure, investment goals, and other criteria.
What are the Types of Mutual Funds?
There are many different mutual fund types available, and they can be categorized in a number of ways. Let’s have a look at them now.
Classification Mutual Funds India
The different types of mutual funds in India are:
- Based on asset classes
- Based on the organisation structure
- Based on investment objectives
- Based on portfolio management
- Based on speciality
- Based on risk appetite
Types of Mutual Funds Based on Asset Class
Here is the list of different types of mutual funds based on asset classes:
- Equity Funds: Investing in equity (stocks) and related instruments characterizes equity funds. They may carry the potential for good returns but also come with a degree of risk. Thus, these funds can be suitable for investors who wish to invest for at least 3-5 years. Equity funds come in various types and can be further categorized based on their market capitalization.
- Debt Funds: Debt funds invest in debt instruments, such as government bonds, company debentures, and other securities delivering fixed income. One can consider it a reliable classification of mutual funds in India. Similar to equity funds, debt funds come in various types. It depends on the maturity period of the debt and money market instruments.
- Balance/Hybrid Funds: Balance or hybrid funds are investment vehicles that combine both equity and debt components within a single fund. Typically, they maintain a mix of stocks and fixed-income securities This may offer a middle-ground approach that balances good returns with a moderated risk.
- Money Market Funds: Money market funds are a type of mutual fund that primarily invests in short-term, low-risk securities like Treasury bills and commercial paper. Money markets are also referred to as cash markets.
Type of Mutual Fund Scheme Based on Structure
Here is the list of different types of mutual fund structures:
- Open-End Mutual Fund: Open-end mutual funds are the most common type of mutual funds. These funds continuously issue new shares and redeem existing shares at their net asset value (NAV) based on the current market value of the fund’s underlying securities. Open-end funds may allow investors to buy and sell shares at the end of each trading day. Thus, professional portfolio managers make investment decisions on behalf of the fund.
- Closed-End Mutual Funds: Closed-end mutual funds have a fixed number of shares issued through an initial public offering (IPO). After the IPO, these funds trade on stock exchanges like regular stocks. Unlike open-end funds, closed-end funds may not continuously issue new shares or redeem existing shares. Therefore, the supply and demand factors in the market can determine the price of closed-end funds.
- Interval Funds: Interval funds combine the features of both open-ended and closed-ended funds. They are available for purchase or redemption only at specific intervals, determined by the fund house and remain closed the rest of the time. Additionally, no transactions are allowed for a minimum of two years. Investors aiming to accumulate a lump sum for a short-term financial goal, typically within the range of 3 to 12 months, can find these funds well-suited.
Type of Mutual Fund Scheme Based on Investment Goal
Here is the list of various types of mutual funds in India based on investment objectives:
- Growth Funds: Growth funds are mutual funds that focus on capital appreciation by investing in stocks or other growth-oriented securities. The primary objective of growth funds is to generate long-term growth by investing in companies with high growth potential. They may focus on different market capitalizations, such as large-cap, mid-cap, or small-cap stocks, depending on their investment strategy. Growth funds tend to have higher risk and volatility compared to other types of mutual funds.
- Income Funds: Income funds, also known as bond funds or fixed-income funds. This classification of mutual funds primarily invests in fixed-income securities such as government bonds, corporate bonds, and municipal bonds. The primary objective of income funds is to provide a steady stream of income to investors. Income funds tend to have lower risk and volatility compared to equity funds.
- Liquid Funds: This type of mutual fund scheme primarily invests funds in short-term or very short-term instruments. This may include T-Bills and CPs, aiming to ensure liquidity. With low risk and moderate returns, these investments suit individuals with short-term investment horizons.
- Tax Saving Funds (ELSS): These funds primarily focus on investing in equity shares, making investments in them eligible for deductions under the Income Tax Act. While they may carry risks, they also present the potential for substantial returns if the fund performs.
- Pension Funds: Asset management companies introduce pension funds, also known as retirement funds, as a solution for retirement planning. These funds typically have a lock-in period of a minimum of five years or until retirement, whichever occurs earlier. Thus, they can be managed as equity, debt, or hybrid funds, leading to the presence of multiple plans within this category.
- Fund of Funds: Also known as multi-manager funds, fund of funds invest in a portfolio of other mutual funds rather than directly in individual securities or assets. Through diversified investments in multiple funds, these funds aim to mitigate investment risk and potentially enhance returns.
- Gold Funds: Gold funds invest in gold Exchange Traded Funds (ETFs). Their objective is to mimic the performance of gold prices in India. It may offer investors the chance to invest in gold without possessing the physical metal.
Types of Mutual Fund in India Based on Portfolio Management
Let’s have a look at the 2 types of mutual funds based on the portfolio classification of mutual funds in India.
- Active Fund: In active funds, the fund managers actively manage the portfolio by making sound decisions by deciding which securities to buy and sell. These funds can be structured to surpass a designated benchmark index or attain superior returns by employing active management strategies.
- Passive Funds: Passive funds are designed to replicate the performance of a particular market index. They are called ‘passive’ because they do not engage in active stock selection or market timing strategies.
Types of Mutual Fund in India Based on Risks
Based on the risk appetite, here is a list of type of mutual funds India below.
- Very Low Risk Mutual Funds: Very low-risk funds typically refer to investment funds that can be characterized by a minimal level of risk. These very low risk category mutual funds are designed to preserve capital and provide stability to investors. As a result, this may make them suitable for those who prioritize capital protection over the potential for high returns.
- Low-Risk Mutual Funds: Low-risk mutual funds can be ideal for investors who prioritize capital preservation over growth. Also, who might be willing to accept lower returns in exchange for minimal risk. These low risk category mutual funds may invest in low-risk securities such as cash, short-term debt, and government bonds. Money market funds and short-term bond funds can be popular examples of low-risk mutual funds.
- Moderate Risk Mutual Funds: Moderate risk mutual funds can be suitable for investors who seek a balance between capital preservation and growth. These funds invest in a mix of equities and fixed-income securities to provide a moderate level of risk and return. Balanced funds and index funds are popular examples of moderate-risk mutual funds.
- High-Risk Mutual Funds: High-risk mutual funds can be suitable for investors who seek high growth potential and might be willing to accept risks and volatility in exchange for good returns. These funds may invest in high-risk securities such as small-cap stocks, emerging market equities, and sector-specific funds. Aggressive growth funds and sector-specific funds can be popular examples of high-risk mutual funds.
Type of Mutual Fund Schemes Based on Speciality
Speciality funds are also known as sector-specific or thematic funds. Now, let’s have a look at a few mutual fund examples of thematic funds below:
- Sector-Specific Funds: Sector-specific funds, also known as speciality funds, are mutual funds that focus on investing in a specific sector or industry, such as technology, healthcare, energy, or consumer goods. Sector-specific funds tend to have higher risk and volatility compared to diversified funds due to their concentrated exposure.
- Index Funds: Index funds are mutual funds that aim to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. These types of mutual fund schemes invest in the same securities in the same proportion as the index they track. These types of mutual funds may have lower portfolio turnover and lower expense ratios compared to actively managed funds. Index funds can be suitable for investors who prefer a low-cost, diversified investment approach.
- Global Funds: International funds, commonly referred to as global funds, enable Indian investors to participate in foreign securities and markets. Investing in international markets offers investors the opportunity to diversify their portfolios.
- Commodity-Focused Stock Funds: Commodity-focused stock funds concentrate their investments in companies related to the production, exploration, or distribution of commodities. These funds provide investors with exposure to the performance of commodity markets through equities.
- Asset Allocation Funds: Also known as balanced funds, dynamically distribute investments across a mix of asset classes, such as stocks, bonds, and cash equivalents.
- Gift Funds: Yes, you have the option to gift a mutual fund or a SIP to your dear ones, ensuring their financial well-being in the future.
- ETFs: Belongs to the index funds category, Exchange-Traded Funds (ETFs) are traded on exchanges. ETFs have opened up new avenues for investment, allowing investors to access global stock markets and specialized sectors. Similar to a mutual fund, an ETF allows traders to engage in real-time trading, experiencing fluctuating prices throughout the day.
To Wrap It Up…
Start investing in mutual funds and understanding the different types of mutual funds is essential for successful investing. By categorizing mutual funds based on asset class, structure, investment goals, portfolio management, risks and other criteria, investors can align their investment needs and preferences with suitable options. Whether you are a conservative investor seeking stability or an aggressive investor chasing higher returns, there is a mutual fund category to match your risk tolerance and investment objectives.
As always, investors must do their own research and/or consult their financial advisor before investing.
Mutual funds are an investment vehicle where investors pool their money to create a professionally managed portfolio of stocks, bonds, or other securities, providing diversification and expert fund management.
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Professional fund managers make investment decisions, and profits or losses are shared among investors.
The exact number of mutual fund types in India varies as schemes evolve, but falls broadly into four main categories based on asset class: Equity, Debt, Money Market, and Hybrid. Each category then branches into sub-categories like growth or income, offering investors diverse options.
The three main types of mutual funds in India are Equity Funds, Debt Funds, and Money Market Funds.
There are mainly seven types of mutual funds in India. Such as gilt funds, income funds, short-term funds, credit opportunities funds, fixed maturity plans (FMPs, liquid funds, and monthly income plans.
Some mutual funds may allow investors to switch between different funds within the same fund family. This process involves selling units of one fund and using the proceeds to buy units of another fund within the same family. The terms and availability of switching vary based on the mutual fund company.
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