Delve into the diverse landscape of mutual funds. This guide elucidates offering insights to help you make informed and strategic investment choices.
What Is a Mutual Fund?
Mutual fund is an investment vehicle that collects the money of several investors and invests in a variety of stocks, bonds, and other securities together. Expert fund managers oversee these assets, choosing investments on the investors’ behalf. With comparatively little capital, mutual funds give people the chance to invest in a variety of assets, promoting diversification and lowering risk. The value of the mutual fund shares, which are owned by investors and are subject to fluctuations in the performance of the underlying assets, makes it a widely accessible and well-liked investment option.
Types of Mutual Funds
There are many different kinds of mutual funds that can accommodate varying risk tolerances and investment goals. The primary categories include equity funds, which invest in stocks funds and are known for growth potential but higher risk. Type of mutual fund are:
- Equity fund
- Debt fund
- Money market fund
- Hybrid fund
Based on Asset Class Mutual Fund
Asset class mutual funds are categorised based on the types of assets they invest in, such as stocks, bonds, or a mix of both. Equity funds target stock investments, offering potential growth but higher risk. Debt funds primarily invest in bonds, providing stability with lower risk. Hybrid funds combine both asset classes for a balanced approach. These categories help investors tailor their portfolio to their risk tolerance and financial goals.
Equity Funds
Mutual funds that specialise in stocks are known as equity funds, and they give investors the chance to own a diverse portfolio of company shares. Although these funds have a reputation for having the ability to appreciate in value over time, the volatility of the stock market increases their risk.
Debt Funds
Debt funds are a type of mutual fund primarily invested in fixed-income securities like government and corporate bonds, debentures, and other debt instruments. They aim to generate steady income and are considered lower risk compared to equity funds. Debt funds are suitable for investors seeking regular interest income and capital preservation, making them an integral part of a diversified investment portfolio. Their returns are influenced by interest rate fluctuations and credit quality of the underlying bonds.
Money Market Funds
Money market funds make investments in short-term, low-risk securities like commercial paper and Treasury bills. They are a conservative option since they seek to give investors stability and liquidity. These funds are frequently utilised as a safe haven during erratic market conditions or as a temporary parking fund.
Hybrid Funds
Hybrid funds, also known as balanced funds, combine both equity and debt investments within a single portfolio. These funds offer a balanced approach, aiming to provide growth potential through stocks while mitigating risk with fixed-income securities. Hybrid funds are suitable for investors seeking a mix of capital appreciation and stability.
Based on Investment Goals in Mutual Fund
Growth Funds
It invests in the stocks of businesses with strong growth potential in the hopes of achieving long-term capital appreciation.
Income Funds
Investing in debt instruments like corporate and government bonds aims to yield consistent returns for investors.
Liquid Funds
It makes investments in highly liquid short-term debt instruments, making it simple for investors to take their money out when needed.
Tax-Saving Funds
Under Section 80C of the Income Tax Act of 1961, it provides tax benefits. They invest primarily in equity stocks, but have a lock-in period of 3 years.
Aggressive Growth Funds
It invests in high-risk, high-reward growth company stocks. They are appropriate for long-term investors with a high tolerance for risk.
Capital Protection Funds
It aims to protect investors’ capital while providing some potential for growth. With an emphasis on capital preservation, they make investments in a variety of debt and equity instruments.
Fixed Maturity Funds
It invests in a portfolio of debt instruments with a fixed maturity date. This means that investors know exactly when they will receive their investment back.
Pension Funds
It is designed to provide investors with a regular income in retirement. They invest in a mix of equity and debt instruments, with a focus on generating long-term returns.
Based on Structure
- Investors can purchase and sell units of open-ended mutual funds on any business day
- Closed-ended mutual funds have a fixed number of units that are offered to investors for a limited period of time. Only the stock exchange will allow units to be traded after the initial offering period has ended
- Interval funds are a hybrid between open-ended and closed-ended funds. They let investors purchase and sell units at specific, predetermined intervals
- Exchange-traded funds (ETFs) are similar to closed-ended mutual funds, but they trade on the stock exchange like shares.
| Disclaimer: The article is just for informational purposes and does not suggest or support investing in Mutual funds. Remember mutual funds are subject to market risks. It’s paramount to consult investment experts before making investments. Vakilsearch does not endorse and does not recommend making investments to the readers. |
Based on Risk Mutual Fund
- Very Low-Risk funds invest in debt instruments such as government bonds and money market instruments. Although these mutual funds are safer than other kinds, they also give lower returns
- Low-Risk funds invest in a mix of debt and equity instruments, with a focus on capital preservation. These funds offer a good balance of risk and reward
- Medium-Risk funds invest primarily in equity stocks, but they also allocate some of their assets to debt instruments. Investors with a medium-term investment horizon and a moderate appetite for risk can consider these funds
- High-Risk funds invest primarily in equity stocks, including small-cap and mid-cap stocks. Although these funds have a higher degree of risk, they have the potential to yield large returns.
Specialized Mutual Funds
Investments in a specific industry, such as technology, healthcare, or finance, are made by sector funds. With these funds, investors can choose to overweight a specific industry in their portfolio:
- Index funds follow a particular market index, like the BSE Sensex or the NSE Nifty 50. These funds provide a cheap option for investors to make stock market investments in India
- Mutual fund investments are made by funds of funds. With the help of these funds, investors can diversify their holdings across a range of asset classes and financial techniques.
Emerging Market Funds
Emerging Market Mutual Funds invest in stocks from emerging markets, such as China, India, and Brazil. These funds offer investors the opportunity to participate in the growth of emerging economies, but they also come with a higher degree of risk.
International Funds
International Mutual Funds invest in stocks from developed markets, such as the United States, Europe, and Japan. These funds offer investors the opportunity to diversify their portfolio globally, but they also come with a higher degree of risk.
Global Funds
Global Mutual Funds invest in stocks from both developed and emerging markets. These funds offer investors the most diversified exposure to the global stock market, but they also come with the highest degree of risk.
Real Estate Funds
It makes investments in real estate holdings, including apartments, office buildings, and retail centres. These funds give investors access to the real estate market without requiring them to actively buy and manage real estate.
Commodity-focused Stock Funds
It is invested in stocks of companies that are involved in the production or sale of commodities, such as oil, gas, and gold. These funds offer investors the opportunity to participate in the growth of the commodity sector, but they also come with a higher degree of risk.
Market Neutral Funds
It is a variety of strategies to hedge against market risk. These funds are suitable for investors who want to generate returns that are not correlated with the stock market.
Inverse/Leveraged Funds
It is designed to provide the opposite or amplified returns of a benchmark index. These funds are complex and risky, and they are not suitable for most investors.
Asset Allocation Funds
It is invested in a variety of asset classes, including debt, real estate, and equity. These funds provide investors with a professionally managed, diversified portfolio.
Gift Funds
It is a type of mutual fund that can be used to give shares of a mutual fund to someone else. These funds offer a convenient way to give the gift of investing.
Exchange-traded Funds (ETFs)
They trade on an exchange like stocks, but they are comparable to mutual funds. ETFs provide a cheap means for investors to make a wide range of asset classes.
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Conclusion
Mutual funds are a versatile investment vehicle that can be used to meet a variety of investment goals. When choosing a mutual fund, it is important to consider your risk tolerance and investment horizon. It is also important to choose a fund with a management team that has a proven track record of success. Get in touch with Vakilsearch experts for more details.
FAQs
What are the 4 types of mutual funds?
Mutual funds come in four primary varieties: money market funds, hybrid funds, debt funds, and equity funds.
What are the 4 types of mutual funds in India?
The four categories of mutual funds available in India are liquid funds, debt funds, hybrid funds, and equity funds.
What are the major classifications of mutual funds?
Major classifications of mutual funds include equity funds, debt funds, hybrid funds, and specialty funds, such as sector-specific or thematic funds.
What are the types of mutual funds by structure?
Mutual funds can be categorised by structure as open-end and closed-end funds, with open-end funds being more common.
What is the full form of SIP?
SIP stands for Systematic Investment Plan, a method for investing in mutual funds regularly.
Which type of mutual fund is best?
The best type of mutual fund depends on your financial goals and risk tolerance. Common options include equity, debt, and hybrid funds.
What are the two main types of mutual funds?
The two main types of mutual funds are equity funds and debt funds, which represent stocks and bonds, respectively.
How many types of funds are there in SIP?
SIP offers various types of funds, including equity SIP, debt SIP, and hybrid SIP, catering to different investment preferences.
Is SIP 100% safe?
While SIP investments come with market risks, they are generally considered safe over the long term due to diversification and professional management.
How many mutual funds are there?
There are thousands of mutual funds available worldwide, each with its investment strategy and objectives. The exact number may vary over time as new funds are created and existing ones close.
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