GoalFi

Types Of Mutual Funds And Their Benefits

For a commoner in India, mutual funds are the go-to means to save taxes. With 31% percent of Indians invested in mutual funds, it is the most popular platform for diversified investments.

Having said that, mutual funds are not limited to saving taxes, and the vastness of it deserves to be studied in depth.

Depending on your risk appetite, you may go for a liquid fund, index fund, or growth scheme, and we’re going to briefly explore the other options under the mutual fund’s umbrella. 

Synopsis:What are Mutual Funds? What is the Basic Structure of Mutual Funds?Open-ended Mutual FundsClose-ended Mutual FundsInterval Mutual FundsCategories of Mutual FundsEquity mutual fundsDebt mutual fundsHybrid mutual fundsSolution-centric mutual fundsMutual Funds Based on InvestmentEquity-linked saving schemes (ELSS)Liquidity mutual fundsCapital protection mutual fundsFixed maturity mutual funds (FMF)Pension fundsWhat is Risk Appetite? 

What are Mutual Funds? 

In simple terms, mutual funds are investment schemes that collect people’s money and invest it in various assets. The said assets may be short-term debts, stocks, government/corporate bonds, and expert investors do so with their innate insight into the market. 

The holding of the fund is termed a ‘portfolio,’ and investors are part owners of the mutual fund and the income/loss it incurs. 

Furthermore, mutual funds are classified into structure, assets, and goals, other than based on risk appetite. 

What is the Basic Structure of Mutual Funds?

The fundamental structure of mutual funds can be divided into three parts based on the ease of investment. Namely – open-ended, close-ended, and interval mutual funds.

1. Open-ended Mutual Funds

Like the name entails, you can invest and withdraw your funds at any given time in an open-ended mutual fund. As there is no stipulated fixed maturity period, investors have the leeway to exit on a whim – which makes this a popular option comparatively. 

As it is evident that investors would make the most of this structure, most open-ended mutual funds are liquid by nature to appease the speed of transaction.

2. Close-ended Mutual Funds

Traded on the stock exchange, close-ended mutual funds have a pre-decided maturity date. Offered to investors during launch or New Fund Offer (NFO), funds are transacted within this period and not before or after. 

On the maturity day, your investment is automatically redeemed, and as a result, close-ended mutual funds offer high levels of liquidity to investors. 

3. Interval Mutual Funds.

Interval mutual funds are essentially close-ended funds with the added benefits of open-ended mutual funds. In this, investors are allowed a window between close-ended funds where they can enter or quit the fund. 

Statistically, interval mutual funds provide returns between 6 to 8% in a standard 5-year period. \

Now that we have clarity about the three mutual fund schemes let us learn about the various mutual fund categories. 

Categories of Mutual Funds

Based on the assets they’re invested in, mutual fund schemes are divided into equity, debt, hybrid, and solution-oriented mutual funds. 

1. Equity mutual funds:

As the name suggests, equity mutual funds invest in the stock market, and consequently, the risk is higher. With that said, equity funds are known to yield higher returns based on the performance of the company invested in and the strategy behind this investment. 

Equity mutual funds can be further classified into small-cap, mid-cap, large-cap, focused, and others. 

If you’re looking for a long-term investment (5 years minimum), equity mutual funds are the way to go.  

2. Debt mutual funds: 

Not to be deceived by the name, debt mutual funds are relatively minimal risk investments. When you opt to invest in it, your money is invested in government, corporate, or treasury bonds, which are fixed-income securities. 

You can further classify debt mutual funds into liquid, credit risk, overnight, gilt, and other funds. 

3. Hybrid mutual funds:

The beauty of mutual funds is there is always options to entertain hybrid ideas. Experts invest in equity and debt asset classes to provide the investor with the benefits of a diversified portfolio. 

Generally divided into an aggressive or balanced fund, a hybrid fund is further classified into conservative, dynamic, multi-asset, arbitrage, and others. 

4. Solution-centric mutual funds:

The go-to option for tax saving and long-term saving, solution-oriented mutual funds have a lock-in period – generally five years. As these are illiquid and close-ended funds, investors can’t withdraw these funds on a whim. As a result, solution-oriented mutual funds are ideal for emergency funds, education savings, savings for children, or marriage. 

Mutual Funds based on Investment

Other than the said used cases, mutual funds offer individuals the liberty to save money with the objective of investment in particular. 

Growth mutual funds:

Growth funds are invested in companies that are noticeably performing better in the market compared to their peers. Investing in these high-performing stocks, capital appreciation is considered growth funds, and it is classified into small, mid, and large-cap investments. 

Growth funds generally attract seasoned investors looking for higher returns over a longer duration. 

Equity-linked saving schemes (ELSS):

With a minimum investment period of three months, ELSS invests predominantly in company securities. As ELSS qualifies for tax deductions under section 80C of the Income Tax Act, this is a favorable option for individuals looking for tax savings. 

Liquidity mutual funds: 

Liquidy means easier transactions, making it the ideal scheme for short-term investments and withdrawals. Ideal for investors with a low-risk appetite, this low-return scheme is best suited for people looking to save money for a short-term period. 

Capital protection mutual funds:

As the name suggests, this is for people who are looking for contingencies in their investments to avoid loss. Invested in fixed incomes and into equities, this close-end hybrid fund has the scope for capital appreciation and a spot in upturns of the market. 

Fixed maturity mutual funds (FMF):

Invested in debt instruments, an FMF usually has the same maturity tenure as the fund itself. Based on the fund, this tenure may vary from a few months to a few years. 

Pension funds: 

Invested with the expectation of steady/regular returns over a long duration, a pension fund is generally a hybrid fund, and investors with a low-risk appetite lean towards it. 

What is Risk Appetite?

Risk appetite is simply the bandwidth of risk an investor is ready to take while investing in mutual funds. Categorized into very-low-risk, low-risk, medium-risk, and high-risk mutual funds, risk appetite is explained in due course of this article.

While low-risk funds are generally liquid funds, medium-risk funds are hybrid, and high-risk funds usually offer higher returns, with the prerequisite chances of substantial losses. 

Having said that, every mutual fund is required to disclose the risk exposure to every investor during the time of investment. 

Final thoughts

Experts suggest individuals take professional help while initially investing in mutual funds. As time passes, individuals can turn into investors by thoroughly understanding the nuances & depths of mutual funds.

In due process, make the most of mutual funds calculators, SIP calculators, risk-o-meters, and other tools available online for free. 

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this Post and Follow us on :

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor

Facebook
Twitter
LinkedIn