What are the Different Mutual Fund Types And Their Benefits?
Savings and investments have evolved over the years, from hidden shelves in cupboards and piggy banks to savings accounts, fixed deposits (FDs) and recurring deposit (RDs) to equities and funds.
Equities have always been a lucrative investment option, but the risk involved has always been a deterrent to many. Besides, there is a lot of research and knowledge required to successfully invest directly in equities and make profits. On the other hand, some people want the security offered by bank deposits and are okay with getting lower returns than equities. Hence, there is a large variety of mutual funds types available that address these specific concerns of investors.
Here are the three different types of mutual funds that are available in India:
- Open Ended Mutual Funds
- Debt/Income Funds
- Money Market/Liquid Funds
- Equity Funds
- Index Funds
- Sectoral Funds
- Tax Saving Mutual Funds
- Close Ended Mutual Funds
- Capital Protection Funds
- Fixed Maturity Plans
- Interval Funds
1. Open-Ended Mutual Funds
You may buy and sell units at any point while investing in open-ended mutual funds. There is no lock-in period or fixed maturity date. Below are four sub-categories of such funds.
• Debt or Income Funds
Debt Funds are the least risky type of mutual fund investments, as the corpus is invested in government securities, debentures, and other debt-related instruments. This is a low risk-low return investment and is ideal if you are willing to assume low risks and earn regular income.
• Money Market or Liquid Funds
Liquid Funds invest their pooled money in short-term financial instruments. These funds are ideal if you want to park your surplus money in mutual funds that earn better returns than FDs and savings accounts in the short term. This allows you to earn returns in the interim period while awaiting lucrative opportunities.
• Equity / Growth Funds
Equities are the highest yielding type of mutual fund. The accumulated corpus is principally invested in equities, thus being a high risk-high return portfolio. This is the ideal investment if you want long-term capital appreciation. Equity funds are further classified as below.
- A. Index Scheme
Index funds that invest in indices such as the Nifty or Sensex. These adopt a rather passive investment strategy that performs in tandem with the movements of the indices.
- B. Sectoral Scheme
Sectoral Mutual Fund schemes invest in instruments of a particular sector such as pharmaceutical, infrastructure, information technology (IT), and others. Sector funds may also invest in companies with small, medium, or large market capitalization. The risk involved is closely tied to the sector risks.
- C. Tax Saving
Also known as Equity Linked Savings Scheme (ELSS), this type of mutual fund has a three-year lock-in period and offers tax benefits. The fund corpus is invested in equity-related instruments and offer long-term capital appreciation. As per Section 80C of the Income Tax (IT) Act, the investments made in ELSS funds are exempt from income tax.
Balanced Fund is the perfect mix of equities and fixed income securities as per pre-determined percentage. They enable you to enjoy growth and earn an income at periodic intervals. These funds are suitable for the cautiously aggressive investors.
2. Closed Ended Funds
Close-Ended Mutual Funds- have a fixed maturity period. You may invest in these only during the launch or New Fund Offer (NFO) period. Here are two types of close-ended MF schemes:
• Capital Protection Funds
Evidently, these funds focus on safeguarding your principal investments and thus invest primarily in high-rated fixed income securities. A marginal component of the corpus is invested in equity. Thus, these funds deliver reasonable returns on your investments.
• Fixed Maturity Plans (FMPs)
As the name suggests, these schemes have a fixed maturity period and the corpus is invested in debt instruments that mature with the fund maturity. Such plans earn a fixed interest or coupon. Since FMPs are passively managed, the expenses on these are lower when compared to actively managed schemes.
3. Interval Funds
This is a mix of open and closed-ended funds that allow you to invest at pre-defined intervals. These type of funds offer the benefits of both open-ended and close-ended types of funds.
Based on your risk appetite, the period you want to stay invested and the type of returns that you expect, you can choose from the different types of mutual funds. It is recommended you choose funds that deliver stability, growth, and income for maximum benefits. Get ready to start your investment journey with mutual fund investments.