Explore Various Types of Mutual Funds in India

When it comes to choosing the best investment avenues in today’s turbulent market conditions, mutual funds emerge out as a great investment option among people in India. But before investing, it is imperative to gain better understanding of mutual funds and its various types.

What is a Mutual Fund?

A mutual fund is typically a pool of money collected from various investors who wish to invest their money in securities such as stocks, bonds, money market instruments and similar assets. Investing in mutual funds can be a lot easier than buying and selling individual stocks and bonds on your own.

Type of Mutual Funds

There are various types of mutual fund schemes to choose from which have been classified by structure, nature and investment objectives.

By nature

Close ended mutual fund – This type of mutual fund carries a predetermined maturity period (e.g. 5-7 years). It is open for registration during the launch of the scheme for a fixed period of time. Investors can choose to invest at the time of the initial public issue and thereafter they can buy or sell the units on the stock exchanges where they are listed. In order to enable an easy exit path to the investors, some close ended funds provide an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices.

Open ended mutual fund – This is the most common type of mutual fund available today. Investors can choose to invest their money in such funds anytime as per their budget and convenience. There is no limit to the number of investors, shares in an open-ended mutual fund unless the fund manager decides to close the fund to new investors. The value or share price of an open-ended mutual fund is determined at the market closing every day and is called the Net Asset Value (NAV).

Interval schemes -Interval schemes generally combine the advantages of both open-ended as well as close-ended schemes. The units may be transacted on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. Some examples of these schemes are FMPs or fixed maturity plans.

By nature

Equity mutual funds – These mutual funds typically invest their money in stocks. These funds are also known as stock funds and aim to grow faster as compared to money market or fixed income funds, so there is generally a high level of risk involved here. One can choose from various types of equity funds, including those that specialize in growth stocks, income funds (value stocks, large-cap stocks, mid-cap stocks, small-cap stocks), or combinations of these.

Debt mutual funds – These funds carry lower risk and provide a stable income to investors. In these funds, money is invested in a combination of fixed income securities such as treasury bills, government securities, money market instruments, and other debt securities of different time horizons. These funds can be further classified as Gilt funds, Income funds, MIPs, Short term plans and Liquid funds.

Balanced funds– As their name suggests, these funds invest money in a mix of equities and fixed income securities. In other words, they aim to establish a perfect balance between returns and risk.

By investment objectives

Growth schemes – These schemes provide capital appreciation over the medium to long term. These schemes generally invest a major portion of their fund in equities to survive short-term drop in value for possible future appreciation.

Income schemes – Also known as debt schemes, these funds invest in fixed income securities such as bond and corporate debentures. These schemes provide regular and steady income to investors. However, they feel slightly disappointed in the capital appreciation front.

Index schemes – These funds aim to check the performance of a specific index such as BSE. The value of the mutual fund will go up or down as the corresponding index goes up or down. Index funds generally carry lower costs than actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.