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Types Of Mutual Funds In India Explained

Updated On Sep 30, 2021

Indian investors are becoming more interested in mutual funds because various investment options offer a variety of advantages to investors. A diverse portfolio, flexibility in investments through SIPs, and a lump amount are just a few of the advantages. The Securities and Exchange Board of India (SEBI) regulates the mutual fund business in India. Although SEBI has classified mutual funds based on where they invest, mutual funds can also be classified in various ways. So, let's have a look at various kinds of mutual funds available in India.

Types Of Mutual Funds In India Explained

The various types of mutual funds are listed below. 

Based on Investment Objective

There are 7 types of mutual funds based on investment objectives. 

  • Growth Funds - Money is primarily invested in equities stocks in these schemes with the goal of capital appreciation. They are considered high-risk funds that are best suited for long-term investors. They are also great for people seeking larger returns on their investments because they are risky funds.
  • Income Funds - These schemes invest money largely in fixed-income securities such as bonds, debentures, and other similar assets to provide investors with capital protection and regular income.
  • Liquid Funds - Money is invested predominantly in short-term or extremely short-term products, such as T-Bills, CPs, and other similar instruments, with the goal of providing liquidity. They are low-risk investments with moderate returns, making them excellent for those with short-term investment horizons.
  • Tax Saving Funds - These are funds that invest largely in equity securities. The Income Tax Act allows for deductions on investments made in these funds. They carry a high level of risk, but they also provide a high level of reward if the fund performs well.
  • Capital Protection Funds - These are funds that invest a portion of their assets in fixed-income instruments and the rest in the stock market. This is done to ensure that the principal invested is protected.
  • Fixed Maturity Funds - Fixed maturity funds invest their assets in debt and money market instruments with maturity dates that are either the same as or earlier than the fund's.
  • Pension Funds - Pension funds are mutual funds that are invested in with the intention of achieving a very long-term goal. They are primarily designed to generate consistent returns when the investor is ready to retire. The assets in such a fund may be split between equities and debt markets, with equities acting as the riskier half of the investment, yielding larger returns, and debt markets acting as a risk-balancer, yielding lower but more consistent returns. These funds' returns can be collected as lump payments, pensions, or a combination of the two.

Based on Structure 

Different qualities like risk profile, asset class, etc., can be used to categorise mutual funds. The structural categorization is rather broad, with the ability to buy and sell individual mutual fund units serving as the primary distinction.

  • Open-Ended Funds - There are no restrictions on open-ended funds, such as a time limit or the number of units that can be traded. These funds allow investors to exchange funds whenever they want and leave when they need to at the current NAV (Net Asset Value). This is the only reason why the unit capital fluctuates as fresh entries and exits occur. If an open-ended fund does not want to accept new investors or cannot manage significant funds, it might elect to discontinue doing so.
  • Closed-Ended Funds - The unit capital to invest in closed-ended funds is predetermined. That is, the fund company is not allowed to sell more than the agreed-upon amount of units. Some funds have a New Fund Offer (NFO) period, during which you must purchase units by a certain date. NFOs have a predetermined maturity period, and fund managers can choose any fund size. As a result, SEBI has stipulated that investors can repurchase the funds or list them on public exchanges to exit the schemes.
  • Interval Funds - Interval funds have both open-ended and closed-ended characteristics. These funds are only available for acquisition or redemption at particular intervals (determined by the fund house) and are otherwise closed. In addition, for at least two years, no transactions will be permitted. These funds are best for investors who want to put aside a large sum of money for a short-term financial goal, such as a vacation in 3-12 months.

Based on Asset Class 

There are 4 types of mutual funds based on the asset class.

  • Equity Funds - Since equity funds typically invest in equities, they are also known as stock funds. They invest the money raised from a variety of investors with a variety of backgrounds in various companies' shares/stocks. The gains and losses connected with these funds are purely determined by how the invested shares perform in the stock market. Furthermore, over time, equity funds have the potential to create considerable profits. Therefore, these funds' risk is usually higher.
  • Debt Funds - These funds invest in debt securities such as firm debentures, government bonds, and other fixed-income assets. They are regarded as secure investments with predictable returns. Since these funds do not deduct tax at source if the investment earnings exceed Rs. 10,000, the investor is responsible for paying the tax.
  • Money Market Funds - These are funds that invest in liquid assets such as T-Bills, CPs, and other similar securities. They are safe investments for people wishing to park excess assets for immediate but modest profits. Money markets, often known as cash markets, involve hazards such as interest risk, reinvestment risk, and credit risk.
  • Balanced or Hybrid Funds - These are mutual funds that invest in a variety of assets. In some circumstances, the proportion of equity exceeds that of debt, whereas in others, the opposite is true. In this way, risk and reward are matched. 

Endnotes

With so many types of mutual funds on the market, determining which one best meets individual investing objectives is a difficult challenge. Moreover, since mutual funds always carry a risk factor, no matter how little, it is essential for investors to study their policy documents thoroughly before investing. It's also a good idea to read the paperwork to ensure that you understand exactly what you have invested in and all of the benefits that come with that investment.

Also read: 

Pension Plans Vs Mutual Funds

What Is Better - Mutual Fund Or ETF?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.   

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