Mutual funds are defined as a pool of money that a group of investors invest to earn profits. Just as the profits are shared within the group of investors, the losses are also incurred collectively. However, different classes and kinds of mutual funds are available in the Indian market. They can be classified on the basis of structure and asset class.
Division based on asset class
- Equity funds
As the name suggests, the money is invested in various stocks and equities with this kind of investment. The returns are higher, but so is the risk profile for these mutual funds.
- Debt funds
In these schemes, the money is invested in company debentures, government bonds, and fixed income shares. Debt funds have low risk associated with the investment, but their returns may be limited.
- Money Market mutual funds
The money is invested in liquid instruments, such as T-Bills, in order to create a relatively risk-free profile. Furthermore, money market investments allow the investor to get an immediate return from the investment. It is best suited to people looking to invest large sums of money.
- Balanced or hybrid funds
In these investment schemes, the money is invested in both debt and equity instruments. Hybrid investments schemes are perfect for investors looking to maintain a balance between the risk and the returns.
- Sector funds
In the case of sector funds, the money is invested in a particular sector of the market, such as banking or infrastructure. The performance of the fund depends directly on the performance of the sector in question.
- Index Funds
These funds are instruments of investments in a fund that mimics a particular index of the stock exchange.
- Tax Saving funds
Similar to equity funds, taxes saving schemes invest your money in equities. However, investors who invest in these schemes are liable to receive an annual tax exemption on their earnings from the said investment.
- Fund of funds
These mutual funds invest your money into other mutual funds and the return depends on the performance of those funds.
Division based on the structure
- Open ended funds
Many new investors wonder what is open-ended mutual funds? Well, mutual funds where units are purchased and redeemed throughout the year are known as open ended funds. The investor is free to transact in the market, without any limitation. The NAV for each unit is the price at which the transactions take place.
- Closed end funds
Closed end funds are those investment schemes where units can be purchased at the initial stage only. Furthermore, investors can redeem their investments only after a pre-determined maturity date.
Mutual funds can also be divided into growth funds, liquid funds, and income funds based on investment objectives. However, this classification takes into account the personal goals of the investor, unlike above-mentioned ones.
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