A meaning of Mutual fund is an investment scheme that offers various options to an investor. Based on the financial goals, an investor can diversify his investment horizon by investing in mutual funds. Interestingly, an investor can invest either for a short- term or long -term. However, it is important to understand that long-term investments are more profitable than short- term. The risk portfolio is divided into asset classes such as debt, equity and money market.
mutual funds investment is different from investing in stocks. A major difference between the two is that unlike shares, mutual fund do not give investors voting rights. Mutual fund represent investment in various stocks and securities instead of just one holding.
To simplify things, mutual funds are divided based on structure, based on Asset Class, based on speciality, based on investment object, based on risk, etc.
Let us understand a few of them.
Types of Mutual Funds
Based on structure
Open ended mutual funds: This is the most common type of mutual fund. Fund houses trade units of mutual funds at Net Asset Value (NAV). These funds allow an investor to exit anytime and decide the payout based in the NAV that is published every day by the fund houses.
Close ended mutual funds: Investors cannot trade on closing of New Fund Offer (NFO). The price of these funds is similar to stocks and is based on the demand and supply. However, close-ended mutual funds are not liquid and their prices are less owing to the low volume of trading. Investors cannot enter or exit from close ended mutual funds till the term ends.
Interval funds: Interval funds are a blend of open ended and close ended funds. These funds are basically closed funds that have an option to transact funds for a pre-decided time. Interval funds have open-ended funds feature for the pre-decided time and close-ended feature for the rest of the time.
Equity Funds: These funds invest a major part in equity stocks of a company. Although equity funds offer higher returns in the long-term, they are risky for a short term investment.
Debt funds: These types of mutual funds usually invest in corporate bonds, government securities, etc. Debt mutual funds are more stable as they are less dependent on market conditions.
Money Market funds: These funds are highly liquid as they are usually invested in short-term investments such as treasury bills, deposits certificates, etc. You may also invest in market funds for a short duration like just a day.
Balanced or Hybrid funds: These funds include both -equity as well as debt funds. These invest an equal amount in equity and debt funds in order to balance the risk level in investment.
Growth Funds: Here the money is invested in growth funds with the sole aim of getting a capital appreciation. These funds offer high returns in the long run but are usually risky.
Income Funds: In these funds, a fixed income is invested in instruments such as debentures (income funds) and government bonds. Income funds provides you with stable income on investment with a growth of capital.
Liquid funds: Liquid funds are usually invested in short-term instrument such as deposit certificates, treasury bills, etc. Liquid funds allow investors to withdraw his money anytime. These funds are low risks funds and are great for people looking for short-term investment.
ELSS or Tax saving funds: As per the ELSS scheme, an investor is entitled to get a tax exempt of Rs.1,50,000 for a financial year. In ELSS funds, majority of the investment is done in equity stocks and has a lock-in period of only 3 years.
Capital Protection Funds: In capital investment funds, the money is divided between equity and fixed income investment. This helps in protecting the invested money.
Fixed Majority Funds: Here, the investment is made in closed-ended debt funds and these funds have a fixed maturity date.
Pension Funds: These funds cater to an investor’s retired life. Here the funds are invested for long-term so that an investor can get regular pension after he retires. Under this, the funds are invested in equity as well as debt instruments in order to balance the growth and risk of the investment. The returns on these funds can be withdrawn as lump sum or regular pension or both.
Risk Based Funds
Low risk funds: As the name suggests, these funds are low risk funds and are usually invested in debt market. The investments are long-term with moderate returns. A good example of low risk fund is investment in government securities.
Medium risk funds: These funds involve medium risk and are ideal for people who are willing to take moderate risk in investment. The portfolio is usually a mix of both equity as well as debt mutual funds.
High risk funds: Investors willing to take high risks are most suitable for these types of funds. Majority of the investments are done in equity stocks of a company in expectation of high returns.
Specialty Based Funds
Sector Funds: These funds are limited to one sector of the industry. For instance, Real Estate mutual funds will invest in only real estate business. The returns of these funds depend on the performance of that particular sector.
Real estate funds: These funds are invested in the real estate sector and the investment can be done at any phase of the real estate project.
Asset allocation funds: The portfolio manager adjusts the allocated assets in order to achieve the desired results. The investment is divided in bonds and equity.
International funds: Here the investors can invest their money in international companies located in different parts of the world. However, an investor cannot invest in funds from his own country. These funds are also known as foreign funds.
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