Mutual funds in India are one of the popular investment options owing to their flexibility, ease, and diversification benefits. One of the best parts about mutual funds is they offer investment opportunities to all types of risk appetite investors – conservative, aggressive, or moderate. Currently, there are over 40 registered mutual funds providing distinct schemes to meet the dynamic requirements of diverse investors.
Various types of mutual funds can be categorized broadly depending on structure and asset class.
Mutual fund structure
- Open ended funds
Such funds do not put restrictions on when and how many units you can buy. You can enter as well as exit at current NAV (net asset value) throughout the year. It is an ideal option if you are seeking liquidity.
- Close ended funds
Closed ended funds contain pre-determined units and permit purchase just during a particular period. Redemption here is dependent upon maturity date.
- Interval funds
Interval funds allow transactions at a particular period. You can choose to buy or liquidate units when the trading window opens.
Mutual fund asset class
- Equity funds
Equity mutual funds invest in company shares and the returns are based on the performance of the stock market. While such funds have the potential to generate high returns, they are considered risky. Equity funds further are categorized into multi cap fund, large cap fund, large & mid cap fund, mid cap fund, small cap fund, dividend yield fund, value fund, contra fund, focused fund, thematic/sectoral fund and ELSS. Equity mutual funds are ideal for a long-term investment horizon.
- Debt funds
Debt funds invest in fixed income securities like government securities, corporate bonds, and treasury bills. They can provide regular income and stability with relatively minimal risk. Debt mutual funds can be further categorized into overnight fund, liquid fund, ultra-short duration fund, low duration fund, money market fund, short duration fund, medium duration fund, medium to long duration fund, long duration fund, dynamic bond, corporate bond, credit risk fund, banking and PSU fund, gilt fund, gilt with 10-year constant duration and floater fund.
- Hybrid funds
Hybrid mutual funds invest in both equity and debt instruments to form a balance between equity and debt. Ratio of investment can be varied or fixed based on the fund house. Different types of hybrid funds include conservative hybrid fund, balanced hybrid fund, aggressive hybrid fund, dynamic asset allocation or balanced advantage, multi asset allocation, arbitrage fund, and equity savings.
- Solution oriented funds
Such mutual funds are for specific financial goals like forming corpus for your children’s higher education and retirement. They have a lock-in period of 5 years.
Other schemes consist of index funds that invest depending upon definite stock indices and FoFs (fund of funds) that invest in other funds instead of directly investing in bonds, stocks, or securities.
Knowing different types of mutual funds can make it easier for you to align your crucial financial goals with the suitable category depending upon your risk appetite. In addition, it can help you compare your requirements with the fund objectives to make an informed decision.