Different types of mutual fund schemes

What has more health benefits: having an apple or a fruit salad that has an apple and many other fruits? The answer, obviously - a fruit salad since it offers the goodness of - not just one fruit but - an entire assortment. In the world of investments, mutual funds are like a fruit basket. They allow investors to benefit from a diversified portfolio of securities, including stocks, bonds, and money market instruments.
Mutual funds can be a popular investment option for both novice and experienced investors. Also, as mutual funds are professionally managed by fund managers, it helps keep your investment in experienced hands. Nowadays, there are multiple mutual fund options that you can consider as an investor.

Here, we will discuss the various types of mutual funds based on criteria such as asset class, investment objective, and structure.

Categories of mutual funds based on asset class

Mutual funds can be categorised based on the type of asset class they invest in. Under this classification, there are five main types of mutual funds:

Equity mutual funds: These funds primarily invest in stocks and can be suitable for new investors who wish to invest in the stock market but lack the expertise or time to research individual stocks.

Debt mutual funds: These funds primarily invest in fixed-income securities such as bonds and can be suitable for investors who wish to have a relatively steady returns and less risk to capital as compared with equity mutual funds.

Hybrid mutual funds: These funds invest in a mix of equity and debt securities and are suitable for investors who want a balanced portfolio of stocks and bonds. The equity component can deliver potential capital appreciation, while the debt component can generate a steady income.

Solution oriented: Solution oriented mutual fund can help investors achieve their specific financial objective. These funds can also help investors build corpus for life events such as retirement, child education, marriage. Securities Exchange Board of India (SEBI) has specified two solution-oriented funds that AMCs can offer: retirement fund and children’s fund. As their names suggest, they are meant to serve specific purposes and hence provide ‘solution’ to specific requirements.

Other mutual funds: These funds include sectoral funds, thematic funds, international funds, and commodity funds. For instance, sectoral funds invest in specific sectors, such as technology, healthcare, or energy; international funds invest in overseas markets, while commodity funds invest in commodities.

Types of mutual funds based on structure

Mutual funds can also be classified based on their structure. There are two main types of mutual funds based on structure:
Open-ended funds: These funds are the most common type of mutual funds and allow investors to buy and sell units of the fund at any time. The number of units is not fixed, and the fund can issue or redeem units as per the applicable price and the amount of investment. Some of the examples of open-ended funds are given below:

• Index mutual funds: These funds invest in securities that represent a benchmark index, such as the Nifty 50 or the Sensex. They can be suitable for investors who want to invest passively in the stock market and earn returns that are in line with the performance of the index.
• Exchange-traded funds (ETFs): ETFs are similar to index funds and trade on stock exchanges like stocks. The portfolio mirrors a particular index, and the funds can be traded throughout the day at market prices.

Close-ended funds: These funds have a fixed number of units, and the fund is only open for a specific period. Once the fund is closed, investors cannot buy or sell units. These funds can be traded on stock exchanges depending on liquidity.

In conclusion, mutual funds offer a convenient and diversified way to invest in the stock market, bond market, or a mix of both. Understanding the different types of mutual funds based on asset class, investment objective, and structure can help investors choose the right mutual fund that aligns with their investment goals, risk appetite, and investment horizon. It's equally crucial to align your goals with the scheme's investment objectives. If you are new to investing or unsure about investing in mutual funds, you may want to consider consulting a financial advisor or doing further research before making any decisions.

FAQs:

Is it safe to invest in mutual funds?

Mutual funds can be considered a relatively stable investment option than stocks. However, the value of mutual fund investments can fluctuate based on market conditions, and there is no guarantee that investors will earn a profit. It is always advisable to seek the help of a financial expert before making any investment decision.

Can mutual fund schemes be redeemed anytime?

Most mutual fund schemes that do not come with a lock-in period can be redeemed at any time. It's important to read the terms and conditions of a mutual fund scheme carefully before investing to understand any restrictions on redemption.

What is the difference between an open-end mutual fund and a closed-end mutual fund?

Open-end mutual funds continuously issue new units to investors and redeems units from investors who wish to sell, whereas closed-end mutual funds issue a fixed number of units that trade on a stock exchange. This means that open-end funds can fluctuate in size as more units are issued or redeemed, while closed-end funds remain a fixed size.

What are the two important things one should consider before investing in mutual funds?

An investor should carefully analyse his/her financial goals and risk-appetite before investing in mutual funds. In order to make a well-informed decision, investors can seek the help of a financial expert before starting their investment journey.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.