Mutual funds refer to professionally managed funds that pool money from multiple investors and invest in the market. This money is used to buy securities that belong to different asset classes like debt, equity etc.
Mutual funds are the best way to take advantage of the market while minimizing the risk attached to it. However, before you start investing, you need to be aware of the various types of mutual funds available.
The types of mutual funds include-
Based on Asset Class
Equity Funds- These are high-risk funds with the capacity to deliver high returns.
Debt Funds- These are low-risk options that promise fixed returns. They include government bonds, debentures etc.
Money Market Funds- Liquid investments such as commercial papers and treasury bills make up a safe investment with moderate returns.
Hybrid Funds- These funds invest their resources into multiple asset classes like debt and equities. Balanced funds are an example of hybrid funds.
Sector Funds- These funds invest in specific sectors like automobile, pharmaceuticals etc. The risk and returns depend on the stability of the sector. Generally, sector funds are considered to be very risky.
Index Funds- These funds track and mimic the performance of a particular index.
Tax Saving Funds- A high-risk, high return option that invests mostly in equities to avail tax deductions under the Income Tax Act.
Based on Structure
Open-ended Funds- You can purchase or sell the units of this type of mutual fund throughout the year at the prevailing Net Asset Value (NAV). They promise liquidity to the investor.
Closed-ended Funds- These are illiquid investments. You can only redeem the investment after the maturity date.
Based on Objective of the Investment
Growth Funds- The portfolio mostly consists of equity stocks. The main purpose is to allow your capital to grow. They may be risky but are perfect as long-term investments.
Income Funds- These funds buy fixed income securities like debentures and bonds. They become a source of income while keeping your capital intact.
Liquid Funds- If you want to invest your surplus without compromising your liquidity, these low-risk options are the best. They include commercial papers and treasury bills that reap moderate returns.
Before investing your hard-earned money, conduct a thorough research into the market. With proper knowledge, the right kind of mutual fund investment will help you realise your financial goals in the long run.
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