WHAT ARE MUTUAL FUNDS ?
Mutual fund is a unique investment pooling entity which enables investors to invest in a wide range of securities through a single platform. It is like a trust that pools money from different investors who share a mutual investment objective.
All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor.
TYPES OF MUTUAL FUNDS
Mutual funds can be classified in many ways based on the asset class, investment objective, and structure . The various types of mutual funds are listed as below –
BASED ON ASSET CLASS –
Asset class-based classification depends on the assets in which a mutual fund scheme has invested. These consists of following funds :
- EQUITY FUNDS :- These funds invest in equities and equity related instruments. With fluctuating share prices, such funds show volatile performance, even losses. In these funds at least 65% of the fund’s corpus is dedicated to equity and equity-oriented investments.
- DEBT FUNDS :- These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns. These funds are ideal if you aim for a steady income and are averse to risk.
- HYBRID FUNDS :- Hybrid funds are funds that invest in two or more asset classes as per the investment objective and other factors. In some cases, the proportion of equity is higher than debt while in others it is the other way round.
BASED ON STRUCTURE –
There are three different types of funds based on structure-
- OPEN ENDED MUTUAL FUNDS :- In these funds the units are open for purchase or redemption through the year . The key feature of such funds is liquidity. You can conveniently buy or sell your units at net asset value (“NAV”) related prices. These are actively managed funds where fund managers try to invest in instruments with higher returns potential.
- CLOSE ENDED FUNDS :-These funds can only be purchased during the New Fund Offer (NFO) period and the units can be redeemed at a specified maturity date. These funds are also listed on stock exchanges, but liquidity is generally very low.
- INTERVAL FUNDS :– These funds are a combination of open ended and close ended funds. They are opened for repurchase of shares at different intervals during the fund tenure. The fund management company offers to repurchase units from existing unit holders during these intervals.
BASED ON INVESTMENT OBJECTIVE-
All the different types of mutual funds have specific investment objectives. These are listed below –
- GROWTH FUNDS :- The primary goal of investing in these funds is capital appreciation. These are generally equity funds with higher returns potential but a higher level of risk too.
- INCOME FUNDS :- The aim of income funds is to provide regular and steady income to investors. Such funds are less risky compared to equity schemes.
- LIQUID FUNDS :– Under these schemes, money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are low on risk and ideal for short-term investments.
- TAX SAVING FUNDS :– Popularly known as ELSS, these are mutual funds that are eligible for a tax deduction of up to Rs. 1.5 lakhs in a financial year. They are considered high on risk but also offer high returns if the fund performs well.
Thus, a lot of different types of mutual funds are available in the market, therefore the investors must carefully understand all the facilities available and the risks associated with each type of mutual funds before investing .