Mutual Fund Types in India
Investing now-a-days has become a common phenomenon among the Indian middle class. Earlier, people tend to save more and invest less. But with the rapid rise in the technology and increasing awareness about capital market, people nowadays are learning the art of investing to grow their money. There are various investment products in the market for an average investor to invest. One such product which is getting popular day by day among investors is Mutual Fund.
Mutual Fund is basically a pool of money accumulated by several investors to invest in various asset classes such as a bond, equity or shares and other asset classes. The total holding of the mutual fund is known as a portfolio. An investor buys unit in the mutual fund. Each unit represents an investor’s ownership in the fund and the income it generates.
Classification of Mutual Funds
Picking up the right mutual fund is always a challenge for an investor. Before investing, it’s better an investor should have an idea about the various types of mutual funds. Mutual funds are classified on certain characteristics:
- Based on Asset Class
- Based on Structure
- Based on Investment Goals
- Based on Risk
There are various types of mutual fund under each characteristic.
Based on Asset Class:
- Equity Mutual funds: An equity mutual fund mainly invest their money in the equity or equity related instruments.
- Debt Mutual Funds: A debt mutual fund mainly invest their money in the debt related instruments such as government securities or bond.
- Money market mutual funds: Money market mutual funds are ultra-safe, high-quality liquid instrument such as treasury bills, commercial bills, certificates of deposits with having less than one-year maturity time.
- Hybrid Mutual funds: Hybrid mutual funds are like any other type of mutual fund scheme, whose prime aim is to increase the value of investment through capital appreciation mechanism by diversification of investment in two or more asset classes.
Based on Structure:
- Open Ended Fund: An open-ended fund allows an investor to buy and sell units depending upon one’s choice. The units are purchased and sold even after the NFO.
- Close Ended Fund: A close ended fund has capital fixed and they sell a specific number of units. An investor cannot purchase and sell even after the NFO.
- Interval Fund: An interval fund can be bought and sold at an interval determined by the company. These are open for investment during a certain time.
Based on Investment Goals:
There are mainly two prime investment goals to invest in mutual funds, Good returns and tax saving:
- Growth Fund:
A growth fund is mainly a mutual fund or ETF that invest in those companies or stocks, which are expected to grow faster than the overall market.
- Income Fund:
An income fund is a type of mutual fund or ETF that invests in government securities or high dividend generating stocks and bonds which generates regular income for its investor.
This type of funds mainly invests money in debt instrument and money market instrument up to a period of 91 days.
- Tax Saving Mutual funds:
Tax saving mutual funds (ELSS) are those mutual funds, whose prime purpose is the tax saving as well as wealth creation.
- Aggressive Growth Funds:
An aggressive growth fund is a mutual fund which seeks high growth by investing in aggressive growth stocks.
- Capital Protection Funds:
Capital protection Funds are those funds which prime aims is to protect the capital and generate smaller returns. These funds basically invest partly in debt and partly in equity.
- Pension Funds:
Pension Funds are those funds which are good for the retirement. These funds are good for those who want their retirement to be free from financial constraints.
- Fixed Maturity Funds:
These funds have a fixed maturity period and they basically invest in money market, securities, bond etc.
Based on Risk Profile:
- High risk funds:
High risk funds are mainly those funds, which generally carry a high amount of risk but generate impressive returns.
- Middle Risk Funds:
The level of risk associated with medium risk funds is neither too high nor too low. They generate stable returns by investing partly in debt and partly in equity.
- Low Risk Funds:
Low risk funds are mainly those mutual funds, which spreads across a combination of arbitrage funds, ultra-short-term funds and liquid funds. These funds are good in case of extreme volatility in the market.
- Very Low Risk Funds:
Very Low risk funds are ultra-short-term funds, whose maturity extends from a month to a year.
Specialized Mutual Fund:
- Index Fund
- Sector Funds
- Funds of Fund
- Foreign/International Fund
- Global Fund
- Emerging Market Fund
- Market Neutral Fund
- Asset Allocation Fund
- Gilt Fund
- Exchange Traded Fund
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*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.