Different Types of Mutual Funds

Mutual funds have been a go-to investment choice for many investors. In this investment vehicle, funds of multiple investors are pooled and invested in specific asset classes. A professional fund manager oversees these investments and optimises the strategy as needed. 

 

As the investor, you have the opportunity to earn capital gains from these investments and build  your wealth over time. There are various types of mutual funds to choose from and they are categorised based on: 

• Maturity period

• Asset class

• Financial objectives

• Specialty

The maturity period varies for mutual funds and is a notable attribute that sets apart the types of mutual funds in India. 

• Open-Ended Funds

Open-ended funds allow you to purchase or sell units whenever you want. These funds do not possess a maturity time period. You can enter and exit throughout the year at the current NAV price. Since the main feature of these funds is liquidity, it is an ideal investment avenue for investors who prefer short lock-in periods.  

• Closed-Ended Funds

Closed-ended funds have a predetermined maturity period and you can make purchases only within a specific period. Moreover, new investments are not allowed after this period ends. The market price of these funds vary based on factors like demand, supply, and other market forces.

• Interval Funds

Interval funds are a combination of both, open-ended and closed-ended funds. You are allowed to make investments during specific intervals. Additionally, you can buy or redeem your units when this trading window is open.

Learn about the different types of mutual funds based on asset class here.

• Equity Funds

Equity funds are those mutual funds that invest in shares of a company. The returns on these investments are linked with the performance of the stock. While these funds are associated with high risk, they have the potential to generate great returns. 

 

These funds are the best choice if you are looking for a long-term investment and have a higher risk tolerance. Equity funds can be categorised into small, mid and large-cap funds, ELSS, focused funds, etc.

• Debt Funds

In debt funds, your money is invested in fixed-income securities like treasury bills and corporate bonds, among others. These funds are an appropriate option for you if you want stability and low risk exposure. Debt funds are comparatively safer than equity. Additionally, these funds can be further categorised into liquid funds, etc.

• Hybrid Funds

Hybrid funds offer a balance between debt funds and equity funds. The proportion of debt and equity depends on the chosen fund. You can also select between balanced funds and aggressive funds. 

• Other Funds

These funds typically comprise Index funds and Funds of Funds (FOF). While Index mutual funds track indexes, FOFs make investments in other funds. The risk appetite varies and these funds are generally reserved for seasoned investors.

Before investing in a particular type of mutual fund, it’s best to align your investment choices and objectives. 

• Growth Funds

These funds typically invest in high performance stocks, with the main goal of capital appreciation. Investing in growth funds can be the right choice if you seek high returns on investment over a longer duration.

• Fixed Maturity Funds

Fixed Maturity Funds (FMF) invest your money in debt instruments, which possess a similar or the same maturity period as these funds. While the returns may not be as high as growth funds, they offer stability. 

• Pension Funds

Pension funds aim to provide a regular income to investors and they are generally long-term investments. With regard to asset class, pension funds are usually hybrid funds. The returns generated by them are comparatively lower, but they have a higher potential to provide regular returns in the future.

• Liquid Funds

Liquid funds are debt funds that invest in fixed-income investment instruments like treasury bills, commercial papers, etc. These funds have higher liquidity, providing investors predictable returns within a shorter maturity period. 

• Tax-Saving Funds (ELSS)

Equity-linked saving schemes (ELSS) generally make investments in company securities. These funds are tax-saving instruments and you can avail deductions under Section 80C of the Income Tax Act. However, you need to invest in ELSS for a minimum duration of 3 years (lock-in period).

• Capital Protection Funds

Capital protection funds look to protect the invested amount and make investments in fixed income as well as equity instruments. Here, the main goal is to provide added capital security, while generating adequate returns to minimise erosion caused by inflation. 

 

Considering the many types of mutual fund schemes available, it is best that you do some research and consult an expert. Improper planning may lead to losses, especially since mutual funds are exposed to market volatility. 

Through appropriate diversification, you adjust for risks and optimise your investments. Once you have a plan in place, invest in mutual funds of your choice on Bajaj Markets.