Types of Mutual Funds & Their Benefits

Market risks apply to mutual funds; please read the offer document carefully… We’ve probably all seen this commercial on television. But, exactly, what are mutual funds? What are the various mutual fund types? Allow us to assist you in making an educated selection.

What is a Mutual Fund?

A mutual fund is a collection of money from several participants that is pooled to invest in financial securities such as bonds, equities, and other assets. There are several sorts of mutual funds that offer investors a variety of options to let them take risks that are appropriate for them.

Money managers typically operate mutual funds to generate profits for fund investors. Mutual funds are the best option for consumers who want expert money management assistance with a diversified risk-return outlook.

In India, mutual funds are regulated by India’s Securities and Exchange Board (SEBI) which provides transparent processes in mutual fund portfolio investment.

Recommended: Hedge Funds in India: The Ultimate Guide

Types of Mutual Funds in India:

In India, mutual funds are classified into two categories.

  1. The nature of the investor
  2. Based on the type of investment, such as shares, debt, or a combination of both

Based on Investor Nature:

Open-Ended Funds:

There is no predetermined maturity period for these mutual funds. An investor can enter or exit a mutual fund investment at any time.

Closed-Ended Funds:

Closed-ended mutual funds are traded on stock exchanges. An investor can usually participate in these funds during the Initial Public Offerings period and receive the advantages only after the stipulated maturity period has expired. Investors are unable to exit the investment in the middle.

Based on the Nature of Investment: 

Equity or Growth Mutual Funds:

Equity funds are high-risk mutual funds with the potential for high long-term returns. During the prime earning period, these are the most popular mutual funds. They assist investors in participating in the stock market.

They are further separated into three groups:

  • Sector-Specific Funds

Mutual funds that invest in a certain sector have a higher risk factor than those that do not. They are best for persons who have a high risk appetite and expect large profits.

  • Index Funds

Index funds are ideal for consumers who do not want to rely on money managers to invest in mutual funds. Index mutual funds follow the same pattern as their underlying index, such as the BSE. They are appropriate for conservative investors.

  • Tax Saving Funds

Tax Saving Funds, commonly known as Equity Linked Saving Schemes, offer tax advantages to their investors. These mutual funds have a three-year fixed maturity period, and investors can claim a tax credit under section 80C of the Income Tax Act of 1861.

Liquid funds or Money Market Funds

Liquid Funds are the best alternatives for putting money in a savings bank account. These are suitable for people with a low-risk appetite. They offer decent returns in a short period. These are short-term debt money market instruments.

Debt Mutual funds or Fixed Income Funds

These are suitable for people with a low-risk appetite with a low and steady return outlook. These mutual funds invest money in government bonds, securities, debentures, etc., The only risk involved is credit risk.

Balanced Mutual Funds

These mutual funds offer a mix of equities and debt investments. These are appropriate for investors with a moderate appetite for risk. In these balanced funds, the investment allocation changes in response to market risks.

Hybrid or Monthly Income Plans (MIP)

The only difference between these plans and balanced funds is that these plans invest in fewer equity assets than balanced funds do. They are appropriate for persons with low-risk appetites, such as retirees who expect a monthly income.

Gilt Mutual Funds

Gilt mutual funds are pro-government funds that solely invest in government bonds. They are appropriate for investors who do not want their investment to be exposed to credit risk. The sole risk with these mutual funds is the danger of a high interest rate.

Final Thoughts

Mutual Funds are the easiest forms of investments, and even a student can get started with it for as less as INR 100. To get started, check out popular platforms available on the Internet, that allows you to buy and track mutual funds. Some of these platforms include Groww, Zerodha etc. 

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