Have you just discovered the vast and wonderful world of mutual fund schemes in India? If you answered yes to that question, chances are, you are a tad bit confused by the sheer number of choices available to you.
Before you make the all-important decision of which mutual fund to invest in, it is crucial first to understand the different types of mutual fund schemes available today.
Let’s cut to the chase and dive right in. Check out the broad types of mutual fund schemes in India for investors like you.
Mutual funds can be classified into various kinds based on certain key factors, such as:
Let’s take a closer look at the different types of funds under each of the categories listed above.
Based on the organisation structure, mutual funds can be any of the following types.
Open-ended Funds: They have no fixed maturity date. You can buy and sell your units at any point, making them very liquid options.
Close-ended Funds: They have a predetermined maturity period, and you can only invest in them during the initial launch period which is known as the New Fund Offering (NFO).
Interval Funds: These mutual fund plans are a combination of open and close-ended funds. You can trade them at specific intervals only.
Based on the nature of portfolio management, mutual funds can be any of the following types.
Active Funds: These are actively managed by a professional fund manager. This professional is responsible for selecting the portfolio assets, monitoring them, and rebalancing them at regular intervals.
Passive Funds: They don't need active management. Rather, they are benchmarked against market indices, and their composition changes as and when the indices they are benchmarked against are recomposed.
Based on the investment objective, mutual funds can be any of the following types.
Growth Funds: They are mutual funds with a primary objective of increasing the value of the investments made. In these funds, the fund manager chooses assets for the portfolio that have a strong potential for growth in the future, such as growth equity stocks. The primary goal here is capital appreciation.
Income Funds: These are the mutual fund schemes with a primary objective of generating income for their shareholders. These funds may pay out income in the form of dividends and/or may invest in fixed-income generating assets like government bonds, corporate bonds, etc.
Liquid Funds: They focus primarily on liquidity. These funds invest in securities with very short maturity periods of up to 91 days. Some examples of such securities are money market instruments like Certificates of Deposit (CD), Commercial Paper (CP), Treasury Bills (T-bills), etc.
Based on the underlying asset portfolio, mutual funds can be any of the following types.
Equity Funds: These are mutual funds that invest predominantly in the equity market. Typically, they can invest around 65% to 80% of the funds in equity. A small portion is dedicated to other asset classes to balance the risk.
Debt Funds: They invest primarily in the debt market. This includes securities and instruments like government bonds, corporate bonds, other fixed-income securities, and the like.
Hybrid Funds: Hybrid funds invest in a mix of equity and debt. The ratio of these asset classes may be 50:50 or 60:40. These mutual funds are suitable for moderate investors who want to take on some extra risk but also want the security of the debt market.
Money Market Funds: They are simply mutual funds that invest in money market instruments like Treasury Bills (T-bills), Certificates of Deposit (CD), and Commercial Paper (CP). In other words, they are just liquid funds.
Mutual funds can also be categorised into different groups based on their investment themes. There are different types of thematic mutual funds in the Indian financial market, such as ESG funds (which invest in sustainable assets), international funds (which invest in international stocks), and sectoral funds (which invest in specific sectors of the stock market).
Apart from these types of mutual funds outlined above, there are also Exchange Traded Funds (ETFs), which function just like regular mutual funds except for one key difference. Unlike regular mutual funds, ETFs can be traded on exchanges just like stocks.
So, this sums up the fundamental details about the different types of mutual funds in the Indian financial market. Understanding these types can help you make a more informed choice about which mutual funds to include in your investment portfolio.
A hybrid mutual fund scheme invests in more than one type of asset. For instance, some asset classes that hybrid mutual funds may invest in include debt instruments, equity, money market instruments, and more. This kind of asset allocation helps minimise the overall risk of the portfolio.
You need to understand your risk appetite. You also need to factor in the financial goals for which you wish to invest today and choose mutual fund plans that align with the investment horizon and the returns expected for those goals.
You can compare mutual fund schemes online easily and free of cost. When comparing the different mutual fund schemes you have shortlisted, ensure that you see how they match up in key areas like the investment tenure, the risk level, the returns they have offered, the expenses involved, and the management.
The answer to this question is quite subjective. The best mutual fund plan for your portfolio is one that aligns with your investor profile and your risk tolerance. It should also align with the financial goals for which you are investing.
Different mutual fund schemes include: