Mutual funds can be of many types based on their structure, their investment goals, the assets in which they invest, and investment style. All mutual fund schemes irrespective of the instruments in which they invest can be categorised into open-ended or close-ended. While the former category is suitable for people who do not wish to invest their money for a long time, the latter is suitable for investors looking to invest for the long-term. Let us look at the various types of mutual funds and their benefits:
Equity Funds: Offer Long Term Returns
These funds predominantly invest in equity and equity-related instruments. Although categorised as high risk, these funds are preferred by investors looking to earn good returns over the long run. Most equity funds build a portfolio by investing in the stocks of a variety of companies or sectors to distribute the risk. They can be further categorised into:
- Sector Specific Funds- These funds invest in the stocks of a particular sector such as infrastructure, energy, banking and mining. The category also includes funds that may invest based on the market capitalisation of the stocks and include mid-cap funds, small-cap funds, and large-cap funds.
- Index Funds - These funds invest in the stocks forming part of a particular index and are highly suitable for investors wishing to invest in equities without depending on the fund manager’s expertise. These funds generally aim to track or outperform the performance of a specific index like the BSE by investing in stocks in the same proportion in which they are included in the index. These funds carry medium risk.
- Tax-Saving Funds - These include the Equity Linked Saving Schemes or ELSS that come with a three-year lock-in period and offer tax benefits. Investors can choose the lump sum route or the SIP investment route for these funds.
Equity funds can further be categorised into growth funds or value funds depending on the type of stocks in which they invest.
Debt Funds: Offer Stable Returns
This category of mutual funds invests mainly in fixed income instruments or debt options like government securities, bonds, and debentures. Some funds also invest in treasury bills, commercial papers, certificates of deposits, etc. These funds carry a low risk but also earn lower returns than equity funds. Highly suitable for investors with a low-risk tolerance, these funds generate a steady income. These funds offer the benefits of capital preservation while generating a steady income.
Hybrid Funds: Balancing Risk and Returns
As the name suggests these funds invest in a mix of different asset classes like debt and equity. Offering diversified exposure to various types of financial instruments, these funds can be classified into conservative, balanced, or aggressive depending on their investment allocation for equity. These funds are highly suitable for investors seeking a balance between growth and stability.
Exchange-Traded Funds: Offering Liquidity
These funds can be traded on the stock exchanges and track an index or a commodity or bonds or a basket of assets. This category of mutual funds is suitable for investors seeking returns similar to that of an index and liquidity like that of stocks.
Fund of Funds or FoF: Reducing Risk
These mutual fund schemes invest in the units of other schemes of the same mutual fund or other mutual funds that match their investment objective. These passive funds help an investor reduce the risk of investing in one scheme.
Investors can choose to invest based on their risk-tolerance, investment goals, and horizon. They can opt for SIP investment for creating wealth over time and achieving their long-term goals.
