What Is The Mutual Fund And How Many Types Of Mutual Funds Available In India?
A mutual fund helps to pool in the cash that can be invested in different types of underlying securities.
Unit of mutual funds are issued by a mutual fund to investors in accordance with the money invested by them.
Investors share profits and losses proportionately to the investments made by them.
It is essential to register a mutual fund with the SEBI (Securities and Exchange Board of India) before funds can be collected by it from the general public.
Being a well-known option for making investments, a mutual fund provides access to an extensive range of assets.
You will come across certain mutual funds providing higher returns compared to those from traditional investments.
It is a fund manager who is responsible for managing a mutual fund professionally and he makes decisions according to the investor’s financial objectives.
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Different types of mutual funds
It is a fact that mutual funds belong to different categories depending on certain characteristics.
Being an investor, it is imperative for you to evaluate your risk appetite, investment objectives, as well as appropriate investment amount prior to selecting one of them.
Here, we have explained the different types of mutual funds available right now in India.
Mutual fund types based on asset classes
- Equity mutual funds – 65% of funds are allocated by them in shares of companies or equity stocks. Here, it is essential to note that the performance of underlying stock market shares will determine gains and losses. Consequently, it is simple to understand that they also come with comparatively higher risks, unlike others. Apart from being funds associated with higher risks, these will likewise provide the highest returns.
- Money market funds – The money market, also referred to as the cash market, comes with credit risks, reinvestment risks, interest risks, and so forth. These types of mutual funds are known to invest in liquid instruments such as T-bills, dated securities, bonds, etc. Choosing a plan for the short term while investing in these mutual funds will be a decent way to minimize these types of risks mentioned above.
- Hybris funds – Hybrid funds happen to be a blend of stocks and bonds. At times the proportion of equity is greater than debt, and at other times it is just the opposite. For this reason, there is a balance between returns and risk when it comes to hybrid funds.
Mutual fund types based on investment objective
You will come across various types of mutual funds these days having some particular investment objectives. While some emphasize a fixed income, save taxes, and so forth, the rest will assist you in growing your capital. Besides these, there are also several other types of mutual equity funds as mentioned below:
- Liquid funds – Liquid funds are appropriate for investments for the short term and they are low on risk as well. These funds will invest your cash in instruments with maturities of less than 91 days for the purpose of ensuring liquidity. It is essential to bear in mind that the return potential will be lower in case the risk is lower.
- Income funds – Income funds will be suitable for you in case your target is to get income at regular intervals from your mutual fund. On most occasions, money will be invested in bonds and debentures having fixed maturity and providing fixed income.
- Growth funds – On most occasions, these happen to be equity funds with higher risks and higher returns. The main objective of these types of funds will be to grow your capital.
Mutual fund types based on structure
It is also possible to categorize mutual funds depending on their structure. These types of funds are as follows:
- Close-ended funds – It will be feasible to purchase close-ended funds at the time of the NFO (New Fund Offer) period. You will be able to redeem the investment in close-ended schemes following fixed maturity. These funds are likewise listed on stock exchanges; however, there is usually extremely low liquidity.
- Open-ended funds – You will be able to sell and purchase these types of funds all through the year. In this case, fund managers make an attempt to make investments in instruments that have the potential for higher returns. Selling and purchasing of these types of mutual funds will be done according to the present Net asset Value of that fund.
- Interval funds – This fund house opens the fund for purchasing and selling at intervals. They have the features of both close-ended as well as open-ended funds. In most cases, the fund houses repurchase units at the time of the interval period from the investors in case the investor likes to exit.