Different Types of Mutual Funds

Types of Mutual Funds

Mutual Funds are one of the most dynamic investment options. They come with many permutations and combinations to choose from. If you want to invest in Mutual Funds, there are multiple choices available. They are described in detail below under various headings:

Based on Structure:

1.Open-Ended Funds-The investors are allowed to trade their funds at their convenience and take an exit as per their will. There is no limit on period, or the number of units traded. Due to new entries and exits the unit capital keeps on changing. The fund can stop taking in new investors.

2.Closed-Ended Funds-There is a deadline to buy the units during the New Fund Offer period and the unit capital too is pre-defined. The number of units are pre-agreed, they have fixed maturity tenure and are listed on stock exchanges.

3.Interval Funds-These are a mixture of both the above types of funds. Purchase and redemption of units is allowed during a specified time frame, and they remain closed otherwise.  No transactions are allowed during the first two years of investment. 

Based on Asset Class:

1. Equity Funds-The money collected from investors is invested into shares/stocks of various companies. They carry a higher risk as they depend upon the performance of shares in the market. The gains and losses arising from these investments are distributed among the investors in the proportion of their investments. 
2. Debt Funds-The investment is made in fixed income instruments like Gilt Funds, Monthly Income Plans, Liquid Funds etc. They are a good option for risk averse investors who want to get a fixed return with minimal risk. 
3. Hybrid Funds-They have the features of both the equity and debt funds. The proportion of both these types of funds may vary. Those who are ready to take more risk and expect debt plus returns may choose them. 
4. Money Market Funds-The government issues bonds, T bills, certificates of deposits etc. with banks and other financial institutions. These are known as cash market funds or capital market funds. The investors usually get dividends from the funds in the form of returns. 

Based on Goals:

1. Growth Funds-The investors who can take risk and divert their surplus funds for specific sectors allocate their fund towards Growth Funds. 
2. Aggressive Growth Funds-This Fund takes higher number of risks to earn higher returns. Beta dependent calculations tend to reflect beta for the funds which are usually higher than the market beta. 
3. Income Funds-These are like debt mutual funds comprising of bonds, certificate of deposits and securities. They earn more than deposits. Income funds are suitable for risk-averse investors who want to invest for 2-3 years span. These are managed by skilled fund managers. 
4. Liquid Funds-Another category in debt mutual funds, these funds invest in debt instruments along with money market funds. NAV of this category is calculated for 365 days unlike others which consider only business days. The maximum sum to be invested is capped at Rs.10 lakh and the maximum tenure is 91 days.
5. Fixed Maturity Funds-They carry a fixed maturity period ranging from one month to five years. The money is kept in Bonds, Money Market or securities in a way that the interest earned can be aligned with the investment made. 
6. Tax-Saving Funds-This kind of funds invest in equity and bring nontaxed returns at 14-16 percent. ELSS is the example of tax saving funds. These funds mainly attract the salaried individuals with long term investment plans. 
7. Pension funds-You can choose a pension fund like EPF to save over and above other savings options. It is recommended to invest in such funds to secure your retirement life and long-term financial security.
8. Capital Protection Funds-The fund primarily invests in Bonds or Certificate of Deposits. A little part goes to equity. They earn comparatively lesser returns but protect the principal amount invested in it. They give taxable returns but are protected against losses. They have a lock-in period of three years.

Based on Risk:

1.  Very low risk Funds- They are for a period of one month to a year. They offer lower returns and risk factor too is very low.
2. Low risk Funds- They give returns at 6-8 percent. Whenever there is an economic crisis or rupee depreciation, investing in this type of funds is often advisable. As and when the situation stabilizes, one can move the funds to other categories. 
3. Medium risk Funds-The funds are invested both in debt and equity funds. The risk is maintained at a medium level and returns earned range from 9-12 percent.
4. High risk Funds-Meant for those investors who can take risks and expect high returns. Since the funds involve higher risks, they are reviewed constantly. As high as 15-20 percent returns are expected. 

Apart from the above there are other specialized mutual funds too. Among them are Sector Funds that invest in a particular sector. Index funds focus on an index. Real estate funds invest in real estate companies/trusts. These funds are gaining popularity in India for those investors who do not like to invest their money directly into real estate. Funds of Funds put their funds into diverse fund categories. International Funds invest in overseas funds.

Global Funds, Gift Funds, Asset Allocation Funds, Exchange-traded Funds, Leveraged Funds etc. are other types of funds with a specialized way of investment.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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