Types of Mutual Funds
Types of Mutual Funds
Mutual funds are an investment platform wherein a pool of money is accumulated by several investors with the object of saving and making money through their investments. The funds raised in this manner is further invested in various asset classes such as debt funds, liquid assets and the likes of it, after which the profits and losses are shared in equal proportions by the investors. These funds are of various types, and each of them comes with different risk and reward profiles. To make it precise, it is classified based on the basis of investment goals, asset class, structure and risk. This article looks at the different types of Mutual Funds.
Classification Based on Investment Goals
The following mutual funds are classified on the basis of investment objective:
- Growth Funds
- Aggressive Growth Funds
- Income Funds
- Liquid Funds
- Tax-Saving Funds
- Capital Protection Funds
- Fixed Maturity Funds
- Pension Funds
These schemes are considered appropriate for investors with a long-term investment timeline. Growth Funds facilitate investors to make their investments in equity stocks. The fund is particularly intended to provide capital appreciation.
Aggressive Growth Funds
Aggressive growth funds come with plenty of scope for sudden growth. Also, their value rises in a rapid manner. These funds are opted by investors who are in pursuit of higher returns. That said, higher the reward potential, the higher is the risk factor. A here factor here could arise due to sudden price appreciation and other factors.
Income funds are associated with the family of debt mutual funds that distribute their money in a mixture of bonds, certificate of deposits and securities among others. These funds are considered appropriate for risk-averse individuals.
A Liquid fund is another type of debt fund. Its investments are made on debt instruments and money market with a tenure of up to 91 days. The maximum sum of investment here is Rs. 10 lakhs. The striking difference between liquid funds and other debt funds is the manner of calculation of Net Annual Value, which in this case involves 365 days (including Sundays and other holidays) when compared to other funds, which is calculated on business days.
Also known as Equity Linked Saving Scheme (ELSS), it provides investors with the double benefit of building wealth with the option of saving taxes. The lock-in period here is as low as three years. These types of funds are appropriate for long-term and salaried investors.
Capital Protection Funds
Capital protection funds enable the investors in protecting their principal while earning relatively smaller returns. Under this scheme, the fund manager invests a portion of the investor’s money in bonds/CDs, as well as on equities. On a brighter note, investments in this scheme do not lead to losses.
Fixed Maturity Funds
Fixed Maturity Funds work on a fixed maturity period, which akin to FDs, can range between 1-5 years.
Pension funds are meant to secure all major personal and family contingencies like medical emergency or wedding of children of the investor.
Classification Based on Asset Class
Investment based on asset class includes:
- Equity Funds
- Debt Funds
- Money Market Funds
- Hybrid/Balanced Funds
Equity funds are primarily invested in stock, and hence the name stock funds. According to this scheme, money availed from investors of diverse backgrounds are invested in shares of different companies. The profits or losses are then determined by the performance of these shares in the stock market. The growth potential here is high, and so is the scope of risk.
Investments of this kind are utilized in fixed-income securities like bonds, securities and treasury bills; which includes Fixed Maturity Plans (FMPs), Gift Fund, Liquid Funds, Short Term Plans, Long Term Bonds and Monthly Income Plans among others. Funds of such portfolio come with fixed interest rate and maturity date.
Money Market Funds
Money Market Funds, as its name asserts, is traded on the money market. These funds are mostly operated by the government, banks or corporations by issuing money market securities such as bonds, T-bills, dated securities and certificate of deposits among others. Herein, the fund manager invests the money of the investor and disburses regular returns as an exchange.
Hybrid Fund is a mixture of both bonds and stocks; hence the name balanced funds. It operates in a manner wherein two mutual funds are adopted by distributing a reasonable amount of assets in stocks and the rest in bonds or vice versa. Hybrid funds are appropriate for investors who are avid risk-takers.
Classification Based on Structure
The structural classification of mutual fund entails:
- Open-Ended Funds
- Close-Ended Funds
- Interval Funds
These funds are devoid of any constraints in a time period or number of units as an investor can trade funds at their convenience. Its unit capital is subject to constant capital changes with new entries and exits. An open-ended fund may also stall the entry of new investors if the need is felt for the same.
Closed-Ended Funds work with a predetermined unit capital, thereby restricting the sale of more than a pre-agreed number of units.
Interval Funds possess the traits of both of the above-mentioned funds. It can only be purchased or exited at defined intervals (as determined by the fund house) and are closed during other periods. These funds are appropriate for investors who are intent on saving a lump sum amount for an immediate goal.
Classification Based on Risk
The following mutual funds are classified based on risk:
- Very Low-Risk Funds
- Low-Risk Funds
- Medium-Risk Funds
- High-Risk Funds
Very Low-Risk Funds
Funds of such kind are the least risky or devoid of risks. It includes the likes of liquid funds and ultra-short-term funds. Their rate of returns is as low as 6%. Investors opt for this model for the fulfilment of short-term financial goals and the safer storage of money until the realization of such goals.
Liquid, ultra-short-term or arbitrage funds could render a return of 6-8%, which is a tad higher than the funds mentioned above. Also, the investors may switch to higher yielding funds when the valuations get stable.
High-risk funds, as the name suggests, is meant for the investors targeting high returns in the form of interest and dividends. As the readers would have understood by now, the higher the risk quotient, higher is the potential for returns.
As simplistic as it may sound, gift funds refer to the gifting of mutual funds to friends and acquaintances to secure their financial future.
Exchange Traded Funds
These funds are sold on exchanges. It can be traded in real-time at a price which may fluctuate many times in a day.