In India, mutual funds are categorised according to certain attributes, such as asset class, composition, investment purpose and risk. Here are the types and amount of funds for each group. We help you to understand in depth.
Based on Asset Class
Equity Funds: Equity funds make investments mainly in stocks of companies. Equity funds are the most preferred investment options among the majority of investors as these offer high returns and quick growth.
Debt Funds: Debt funds chiefly invest in low-risk fixed-income instruments such as government securities. Since these funds come with a fixed maturity date and interest rate these are ideal for investors with low risk appetite.
Money Market Funds: Money market funds invest in easily accessible cash and cash equivalent securities and offer returns as regular dividends. These funds come with relatively lower risk and are ideal for short term investment.
Hybrid or Balanced Funds:Balanced or hybrid funds invest a certain amount of their corpus into equity funds and the rest in debt funds. Though the risk involved with these funds is relatively high, the generated returns are equally high.
Based on Structure
Open-ended Mutual Funds:
Open-ended mutual funds have no constraints as far as the number of units that can be traded or the time period is concerned. Investors are allowed to trade and exit from the funds at their own convenience.
Closed-ended Mutual Funds:
The unit capital that is to be invested in closed-ended mutual funds is fixed and therefore, it is not possible to sell more than the predetermined number of units. The maturity tenure of the scheme is fixed.
Interval funds can be bought/exited only at specific intervals as determined by the company. These are open for investment for a certain period of time only. Usually, the investors need to stay invested for at least 2 years.
Based on Investment Objectives
Growth funds invest a large portion of their capital into stocks of companies having above-average growth. The returns offered by these funds are relatively high, but the risk involved along with is also quite high.
The corpus of income funds is invested in a combination of high dividend generating stocks and government securities. These funds focus to offer regular income and impressive returns to investors investing for more than two years.
Similar to income funds, liquid funds also make investments in money market and debt securities. However, the tenure of these funds usually extends to 91 days and a maximum amount of Rs.10 lakh can be invested in them.
Equity-Linked Saving Schemes (ELSS) mainly invest in equity and equity-related instruments and offer dual benefits of tax-saving and wealth generation. These funds, usually, come with a three-year lock-in period.
Aggressive Growth Funds:
Aggressive Growth funds carry a relatively high level of risk and are designed to generate steep monetary returns. Although these funds are prone to market volatility, they have the potential to deliver impressive returns.
Capital Protection Funds:
Capital protection funds which chiefly invest in debt securities and partly in equities aim to protect investors’ capital. The delivered returns are relatively low and the investors should remain invested for at least 3 years.
Pension funds are great investment options for individuals who wish to save for retirement. These funds offer regular income and are ideal for meeting contingency expenses such as a child’s wedding or medical emergencies.
Fixed Maturity Funds:
Fixed maturity funds make investments in money markets, securities, bonds, etc. and are closed-ended plans that come with fixed maturity periods. The tenure of these funds could extend from a month to 5 years.
Based on Risk Profile
High-risk funds are funds which carry a high level of risk but generate impressive returns. These funds require active management and their performance must be reviewed regularly as these are prone to market volatility.
The level of risk associated with medium-risk funds is neither too high, nor too low. The corpus of medium-risk funds is invested partly in debt and partly in equities. The average returns offered by these funds range from 9% to 12%.
The corpus of low-risk funds is spread across a combination of arbitrage funds, ultra-short-term funds, and liquid funds. These funds are ideal in times of unexpected national crisis or when the rupee depreciates in value.
Very Low-risk Funds:
These funds could be ultra-short-term funds or liquid funds whose maturity extends from a month to a year. Such funds are virtually risk-free and the returns they offer are generally around 6% at the best.
Specialised Mutual Funds
Index funds invest in an index, and rather than a fund manager managing the fund, these replicate the performance of the index. The stocks in which investments are done are similar to that of the corresponding index.
Sector funds are theme-based funds which invest their corpus in a specific sector to deliver impressive returns. Since these funds invests in a specific sector with a limited number of stocks, these have a high risk profile.
Fund of Funds:
Fund of funds invest in a diversified portfolio and the fund manager invests in one fund that makes investments in several funds rather than investing in various funds as this helps in achieving diversification of portfolio.
Foreign/international funds make investments in companies located outside the investor’s country of residence. These funds have the ability to deliver good returns at times when the Indian stock markets perform well.
Global funds primarily invests in markets across the world as well as in the investor’s home country. Global funds are universal and diverse in approach and carry a high level of risk due to the currency variations and different policies.
Emerging Market Funds:
Emerging Market Funds invests in developing markets. These funds are risky investment options. Since India is also an emerging and dynamic market, these funds are susceptible to market volatilities.
Real Estate Funds:
Real estate funds are special share funds which invest in high-quality real estate directly or through companies which purchase real estates. Though these funds have high associated risk these offer long-term returns.
Market Neutral Funds:
Market neutral funds are great options for those investors who want to be safe from unfavourable market fluctuations while also sustaining healthy returns from their investment at the same time.
Asset Allocation Funds:
These funds invest in equity instruments, debt securities, and even gold. These are highly flexible in nature and can regulate the distribution of funds into equities and debt instruments.
The investors can gift these funds to their family in order to secure their financial future. These can be used to pay all portion or a part of down payment or closing costs. However, these can’t be used to buy an investment property.
These funds which are sold and purchased on exchanges offer exposure to overseas stock markets and specialised sectors. These may be traded in real-time and the prices can increase/decrease many times a day.