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Here are the Types Of Mutual Funds That You Need to Know

INTRODUCTION:

Mutual funds are formed by Asset Management companies ("AMCs"). These AMCs pool in funds from several investors who have a common financial goal. This pool of investment is then run by professional experts known as fund managers. Based on your financial objectives, time horizon, and risk appetite, these fund managers invest in different types of assets, and they manage your portfolio and income. So, if you are a first-time investor who is adept at the basics of the stock market and investing, you may consider investing in mutual funds. That will also provide you with a better chance at diversification.

Additional reads: What is mutual fund

However, before starting your journey in mutual funds, it is prudent to know the basic types of mutual fund schemes that exist. It will enable you to choose and make an informed decision wisely. Here's all you need to know about the different types of mutual funds and their classification.

TYPES OF MUTUAL FUND - A BRIEF UNDERSTANDING AS TO WHICH SCHEME YOU CAN CHOOSE WHILE INVESTING:  

India's mutual funds are primarily based on asset class, investment objective, risk tolerance, and time horizon. They are popularly classified into three basic types: equity funds, debt funds, and hybrid funds. However, their classification is based on the nature of the following characteristics as given below:

I. BASED ON ASSET CLASS:

Based on the risk you can afford and your financial goals, you can wisely choose the fund that will allow you to invest in a particular asset class. These are:

  • Equity Mutual Funds:

    They are funds that invest in stocks or shares of different companies, so the risk involved here is relatively high. The risk depends on several factors, such as the performance of shares invested and the sector of the industry. But at the same time, they can generate higher returns for you, enhancing your income.
  • Debt Mutual Funds:

    They invest in securities such as government bonds, bills, debentures, etc. They will provide you with a fixed interest rate, thus generating a fixed income. It is the best and safest option for you if you are looking at low risk with a regular fixed income.
  • Hybrid Funds:

    Also known as balanced funds, they are funds that invest in both—equity and debt, thus striking a balance between the two if you are willing to take more risk but wish for a fixed income.

2. BASED ON STRUCTURE:

While investing in a mutual fund, you need to decide your fund's structure.  This structure can be ascertained based on your flexibility to invest and the time horizon you have for yourself. These are

  • Open-ended funds:

    if you are looking for something more flexible, this type of fund may be the best option for you. This type of fund will allow you to exit from the investment as it does not have a maturity period. There's no limit on how much you wish to invest throughout the year, and you can keep investing and redeem it at the prevailing Net Asset Values (NAVs).
  • Close-ended funds:

    This type of fund comes with a maturity date. You cannot redeem before the tenure. There's a lock-in period in place. In this type of fund, you will have to purchase units that are already defined. It means, unlike the open-ended scheme, you cannot invest throughout the year. You can support only during the initial launch period known as the New Fund Offer (NFO).

Additional reads:

Understanding the difference between open ended and closed ended mutual funds

  • Interval funds:

    This type of fund is a mixed feature of open-ended and close-ended funds. The funds here will be made available to you for purchase and can be redeemed only during specific periods as decided by AMCs, and so they will remain closed throughout the tenure.

3. BASED ON INVESTMENT OBJECTIVE:

Investment objective refers to the purpose you have invested in mutual funds. It is the financial goal of investors based on which the fund is created. Before you invest in any mutual fund, you need to identify your investment objective, determining the type of fund you are looking for. These are

  • Growth Funds:

    If your goal is to maximize wealth in the long term, this type of investment is suitable for you. In this type of fund, your more significant asset will go into equity stock and shares. There's more risk involved in this type of fund, but it will generate higher returns for you.
  • Income Funds:

    This is the best-suited type of fund for you looking for a low-risk investment. In this type of fund, your investment will be made in deposits, government bonds, securities, debentures, etc., that will give you a fixed, regular income.
  • Balance funds:

    These are hybrid funds where you can make some of your equity investment and some investment in debt, depending on your risk factors and the time.

CONCLUSION:

There are several factors associated with the types of mutual funds in India, and it is based on these factors, you can decide the type of fund you can choose or avoid. Therefore, before investing in any kind of fund, you need to be clear on three things, i.e., your investment objective, the risk you can take, and the time horizon available for you.

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

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