5 common mutual fund types that everyone should know about
Investors are always looking out for avenues where they can park their investments safely and earn considerable returns over some time. The primary motive behind every investment decision is either a steady source of income or long-term wealth creation or both. There are various modes of investment available for an investor in India, the most popular one being mutual funds.
Mutual funds cater to investors from all walks of life and here are the 5 common mutual fund types everyone should know about.
5 popular mutual fund types
There are several types of mutual funds in India that can be categorized on various bases such as asset class, investment objective, speciality, structure, risks involved and several other factors. But there are certain types of mutual funds that are preferred by investors. Here are the five types of mutual funds that everyone should know about.
Tax Saving Funds
As the name suggests, these mutual funds are known for helping investors save on their income tax liabilities. Under Sec 80C of the Income Tax Act, you can avail deduction of up to Rs. 1.50 Lakhs on money invested in tax saving mutual funds in a financial year. More popularly known as ELSS (Equity Linked Savings Scheme), these funds primarily invest in the equity market. As a result, there is a particular element of risk involved in this type of mutual fund. But on the other hand, if it beats the benchmark, you can make better returns compared to that of, say, FD or PPF.
In this type of mutual funds, the units are available for redemption as well as investment throughout the year, i.e. you can keep your investment for as long as you want without any upper or lower limits. Subscriptions and redemptions take place based on the prevailing NAV. There is usually a dedicated fund manager to make investment decisions on behalf of the investors. Within these, the expense ratio of actively managed funds could be a little higher than passive funds. These mutual funds are suitable for those investors who want exposure to the capital market but also want the benefits of liquidity.
These mutual funds invest the money in the equity shares (stocks) of companies. There is a dedicated fund manager to take investment decisions on behalf of the investors. It is essential to understand that direct investment in equities can be pretty risky. But investment via equity funds is a relatively cheaper option. It offers you the benefits of wealth creation along with regular dividends. In the worst case scenario, your NAV might come down slightly as compared to losing your entire investment in case of direct investment in the equity market. This is achieved through diversified investment in various special funds such as banking, oil and gas, infrastructure, automobile, etc.
As the name suggests, these mutual funds invest in debt instruments such as government bonds, fixed income assets, company debentures, etc. Compared to equity funds, debt funds are a safer investment option that offers fixed returns. The short-term capital gains are taxed as per the tax slabs of an individual investor. The long-term capital gains are taxed at 20% with the benefit of indexation.
These mutual funds are subscribed to by investors who have a long-term perspective. The primary purpose of investment in pension funds is to ensure steady returns by the time the investor retires. The investments in pension funds are divided between the debt market and the equity market. The equity component provides higher returns with higher risk while the debt portion provides steady returns. The returns can be received as lump-sum, as pension or a combination of these two. These are just five of the most useful mutual fund types that you must be aware of. Before taking any investment decision, you must do a thorough analysis and consider your risk appetite and funds requirement.