Mutual Fund Schemes: Know Different Types of Mutual Funds in India

There are many types of mutual funds in India to choose from. This is why it is important to first learn about them to make a choice of investment best suited to your financial goals. For this, you also need to understand your financial needs and risk-appetite. How do you want to build your wealth, quickly, slowly or at a moderate pace? Are you willing to take on greater risk if you believe that the returns are likely to be higher? Are you looking for a long-term or short-term option?

Once you answer these questions, you can choose from the most popular mutual funds in India.

Equity or stock funds invest money pooled from investors into shares of various companies. The performance of these shares in the equity market determines the returns. These funds aim at making money quickly. However, since they invest in equities, the risk is relatively greater too.

These funds make investments in debt instruments, such as government bonds, company debentures and various fixed income assets. They have a fixed maturity date and interest rate. So, they are ideal for passive investors looking for a low-risk investment that can generate regular income.

Hybrid Funds, also known as balanced funds, are a combination of equity and debt funds. They invest in both stocks and bonds. The ratio between these two can vary. So, you can go for either a high equity, low debt investment or vice versa, whatever suits you best.

There is a special type of hybrid fund, called arbitrage funds. These funds generate profit by buying securities in the cash market and then immediately selling them in the futures market. The difference in prices between the two markets is where the profit comes from. This is also a low-risk option with reasonable returns, but it requires some expertise.

These make investments in other mutual funds. They are also called multi-manager funds. It is a relatively safe option, since the money is invested in many different types of mutual funds and the risk is thereby adjusted.

Equity Linked Saving Schemes (ELSS) are a mutual fund scheme that is becoming increasingly popular since it gives investors dual benefits of growing money and saving tax. Moreover, it has a lock-in period of just 3 years, which is the lowest among all tax saving investment schemes. This scheme has been known to achieve tax-exempt returns of around 15% and is a great option for long-term investment.

Make sure you carefully read through the policy documents before you invest. And, remember that the markets fluctuate, so researching thoroughly can help boost your chances of getting better returns.