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Considering to invest in Mutual Funds? It is important that you understand the types of mutual funds and their features. Mutual funds can be classified based on the following characteristics.

  1. Based on Asset Class
    1. Equity Funds
    2. Debt Funds
    3. Money Market Funds
    4. Hybrid Funds
  2. Based on Structure
    1. Open-ended Funds
    2. Closed-ended Funds
    3. Interval Funds
  3. Based on Investment Goals
    1. Growth Funds
    2. Income Funds
    3. Liquid Funds
    4. Tax-Saving Funds
  4. Based on Risk
    1. Very Low-Risk Funds
    2. Low-Risk Funds
    3. Medium Risk Funds
    4. High-Risk Funds
  5. Specialized Mutual Funds

 

1. Mutual Funds Based on Asset Class

a. Equity Funds

Primarily investing in stocks, they also go by the name stock funds. They invest the money amassed from investors from diverse backgrounds into shares of different companies. The returns or losses are determined by how these shares perform (price-hikes or price-drops) in the stock market. As equity funds come with a quick growth, the risk of losing money is comparatively higher.

b. Debt Funds

Debt funds invest in fixed-income securities like bonds, securities and treasury bills – Fixed Maturity Plans (FMPs), Gilt Fund, Liquid Funds, Short Term Plans, Long Term Bonds and Monthly Income Plans among others – with fixed interest rate and maturity date. Go for it, only if you are a passive investor looking for a small but regular income (interest and capital appreciation) with minimal risks.

c. Money Market Funds

Just as some investors trade stocks in the stock market, some trade money in the money market, also known as capital market or cash market. It is usually run by the government, banks or corporations by issuing money market securities like bonds, T-bills, dated securities and certificate of deposits among others. The fund manager invests your money and disburses regular dividends to you in return. If you opt for a short-term plan (13 months max), the risk is relatively less.

d. Hybrid Funds

As the name implies, Hybrid Funds (also go by the name Balanced Funds) is an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can be variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in stocks and the rest in bonds or vice versa. This is suitable for investors willing to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.

 

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2. Mutual Funds Based On Structure

Mutual funds can be categorized based on different attributes (like risk profile, asset class etc.). Structural classification – open-ended funds, close-ended funds, and interval funds – is broad in nature and the difference depends on how flexible is the purchase and sales of individual mutual fund units.

a. Open-Ended Funds

These funds don’t have any constraints in a time period or number of units – an investor can trade funds at their convenience and exit when they like at the current NAV (Net Asset Value). This is why its unit capital changes constantly with new entries and exits. An open-ended fund may also decide to stop taking in new investors if they do not want to (or cannot manage large funds).

b. Closed-Ended Funds

Here, the unit capital to invest is fixed beforehand, and hence they cannot sell a more than a pre-agreed number of units. Some funds also come with an NFO period, wherein there is a deadline to buy units. It has a specific maturity tenure and fund managers are open to any fund size, however large. SEBI mandates investors to be given either repurchase option or listing on stock exchanges to exit the scheme.

c. Interval Funds

This has traits of both open-ended and closed-ended funds. Interval funds can be purchased or exited only at specific intervals (decided by the fund house) and are closed the rest of the time. No transactions will be permitted for at least 2 years. This is suitable for those who want to save a lump sum for an immediate goal (3-12 months).

 

3. Mutual Funds Based on Investment Goals

a. Growth Funds

Growth funds usually put a huge portion in shares and growth sectors, suitable for investors (mostly Millennials) who have a surplus of idle money to be distributed in riskier plans (albeit with possibly high returns) or are positive about the scheme. 

b. Income Funds

This belongs to the family of debt mutual funds that distribute their money in a mix of bonds, certificate of deposits and securities among others. Helmed by skilled fund managers who keep the portfolio in tandem with the rate fluctuations without compromising on the portfolio’s creditworthiness, Income Funds have historically earned investors better returns than deposits and are best suited for risk-averse individuals from a 2-3 years perspective. 

 

Income Funds

 

c. Liquid Funds

Like Income Funds, this too belongs to the debt fund category as they invest in debt instruments and money market with a tenure of up to 91 days. The maximum sum allowed to invest is Rs 10 lakhs. One feature that differentiates Liquid Funds from other debt funds is how the Net Asset Value is calculated – NAV of liquid funds are calculated for 365 days (including Sundays) while for others, only business days are calculated.

d. Tax-Saving Funds

ELSS or Equity Linked Saving Scheme is gaining popularity as it serves investors the double benefit of building wealth as well as save on taxes – all in the lowest lock-in period of only 3 years. Investing predominantly in equity (and related products), it has been known to earn you non-taxed returns from 14-16%. This is best-suited for long-term and salaried investors.

e. Aggressive Growth Funds

Slightly on the riskier side when choosing where to invest in, Aggressive Growth Fund is designed to make steep monetary gains. Though susceptible to market volatility, you may choose one as per the beta (the tool to gauge the fund’s movement in comparison with the market). Example, if the market shows a beta of 1, an aggressive growth fund will reflect a higher beta, say, 1.10 or above.

f. Capital Protection Funds

If protecting your principal is your priority, Capital Protection Funds can serve the purpose while earning relatively smaller returns (12% at best). The fund manager invests a portion of your money in bonds or CDs and the rest in equities. You will not incur any loss. However, you need a least 3 years (closed-ended) to safeguard your money and the returns are taxable.

g. Fixed Maturity Funds

Investors choose as the FY ends to take advantage of triple indexation, thereby bringing down tax burden. If uncomfortable with the debt market trends and related risks, Fixed Maturity Plans (FMP) – investing in bonds, securities, money market etc. – present a great opportunity. As a close-ended plan, FMP functions on a fixed maturity period, which could range from 1 month to 5 years (like FDs). The Fund Manager makes sure to put the money in an investment with the same tenure, to reap accrual interest at the time of FMP maturity.

h. Pension Funds

Putting away a portion of your income in a chosen Pension Fund to accrue over a long period to secure you and your family’s financial future after retiring from regular employment – it can take care of most contingencies (like a medical emergency or children’s wedding). Relying solely on savings to get through your golden years is not recommended as savings (no matter how big) get used up. EPF is an example, but there are many lucrative schemes offered by banks, insurance firms etc.

 

Mutual Funds

 

4. Mutual Funds Based on Risks

a. Very Low-Risk Funds

Liquid Funds and Ultra Short-term Funds (1 month to 1 year) are not risky at all, and understandably their returns are low (6% at best). Investors choose this to fulfill their short-term financial goals and to keep their money safe until then.

b. Low-Risk Funds

In the event of rupee depreciation or unexpected national crisis, investors are unsure about investing in riskier funds. In such cases, fund managers recommend putting money in either one or a combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%, but the investors are free to switch when valuations become more stable.

c. Medium-risk Funds

Here, the risk factor is of medium level as the fund manager invests a portion in debt and the rest in equity funds. The NAV is not that volatile, and the average returns could be 9-12%.

d. High-risk Funds

Suitable for investors with no risk aversion and aiming for huge returns in the form of interest and dividends, High-risk Mutual Funds need active fund management. Regular performance reviews are mandatory as they are susceptible market volatility. You can expect 15% returns, though most high-risk funds generally provide 20% returns (and up to 30% at best).

 

5. Specialized Mutual Funds

a. Sector Funds

Investing solely in one specific sector, theme-based mutual funds. As these funds invest only in specific sectors with only a few stocks, the risk factor is on the higher side. One must be constantly aware of the various sector-related trends, and in case of any decline, just exit immediately. However, sector funds also deliver great returns. Some areas of banking, IT and pharma have witnessed huge and consistent growth in recent past and are predicted to be promising in future as well.

b. Index Funds

Suited best for passive investors, index funds put money in an index. It is not managed by a fund manager. An index fund simply identifies stocks and their corresponding ratio in the market index and put the money in similar proportion in similar stocks. Even if they cannot outdo the market (which is the reason why they are not popular in India), they play it safe by mimicking the index performance.

c. Funds of Funds

A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ aka multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse fund categories. In short, buying one fund that invests in many funds rather than investing in several achieves diversification as well as saves on costs.

d. Emerging market Funds

To invest in developing markets is considered a steep bet and it has undergone negative returns too. India itself a dynamic and emerging market and investors to earn high returns from the domestic stock market, they are prone to fall prey to market volatilities. However, in a longer-term perspective, it is evident that emerging economies will contribute to the majority of global growth in the coming decade as their economic growth rate is way superior to that of the US or the UK.

e. International/ Foreign Funds

Favored by investors looking to spread their investment to other countries, Foreign Mutual Funds can get investors good returns even when the Indian Stock Markets do fare well. An investor can employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a feeder approach (getting local funds to place them in foreign stocks) or a theme-based allocation (eg, Gold Mining).

f. Global Funds

Aside from the same lexical meaning, Global Funds are quite different from International Funds. While a global fund chiefly invests in markets worldwide, it also includes investment in your home country. The International Funds concentrate solely on foreign markets. Diverse and universal in approach, Global Funds can be quite risky to owing to different policies, market and currency variations, though it does work as a break against inflation and long-term returns have been historically high.

g. Real Estate Funds

In spite of the real estate boom in India, many are wary about investing in such projects due to multiple risks. Real Estate Fund can be a perfect alternative as the investor is only an indirect participant by putting their money in established real estate companies/trusts rather than projects. A long-term investment, it negates risks and legal hassles when it comes to purchasing a property as well as provide liquidity to some extent.

h. Commodity-focused Stock Funds

Ideal for investors with sufficient risk-appetite and looking to diversify their portfolio, commodity-focused stock funds give a chance to dabble in multiple and diverse trades. Returns are not periodic and are either based on the performance of the stock company or the commodity itself. Gold is the only commodity in which mutual funds can invest directly in India. The rest purchase fund units or shares from commodity businesses.

i. Market Neutral Funds

For investors seeking protection from unfavorable market tendencies while sustaining good returns, Market-neutral Funds meet the purpose (like a hedge fund). With better risk-adaptability, these funds give high returns and even small investors can outstrip the market without stretching the portfolio limits.

j. Inverse/leveraged Funds

While a regular index fund moves in tandem with the benchmark index, the returns of an inverse index fund shift in the opposite direction. Simply put, it is nothing but selling your shares when the stock goes down, only to buy them back at an even lesser cost (to hold until the price goes up again).

k. Asset Allocation Funds

Combining debt, equity and even gold in an optimum ratio, this is a greatly flexible fund. Based on a pre-set formula or fund manager’s inferences on the basis of the current market trends, Asset Allocation Funds can regulate the equity-debt distribution. It is almost like Hybrid Funds but requires great expertise in choosing and allocation of the bonds and stocks from the fund manager.

l. Gift Funds

Yes, you can gift a mutual fund or a SIP to your loved ones to secure their financial future.

m. Exchange-traded Funds

It belongs to the Index Funds family and is bought and sold on exchanges. Exchange-traded Funds have unlocked a world of investment prospects, enabling investors to gain comprehensive exposure to stock markets abroad as well as specialized sectors. An ETF is like a Mutual Fund that can be traded in real-time at a price that may rise or fall many times in a day.

 

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  1. Gilt funds are those funds which invest in fixed-interest generating securities of the central and state governments. You earn returns from gilt funds in the form of interest accrued and capital appreciation on the amount invested.
  2. Sovereign Gold Bond is an alternative for those who want to invest in gold, but do not want the hassle of paying making charges or storing it safely. A low-risk and tax-free investment indeed!
  3. Sovereign Gold Bond is an alternative for those who want to invest in gold, but do not want the hassle of paying making charges or storing it safely. A low-risk and tax-free investment indeed!
  4. Direct & regular funds could be the same mutual fund product. When you buy directly from AMC, it becomes direct fund, and the same becomes regular fund when you get it from a distributor. Read on to find out striking differences & similarities between direct & regular funds.
  5. Small cap mutual funds invest in stocks of large companies or stocks with small market capitalisation. Read on to know the top performing small cap funds.
  6. ELSS funds are equity oriented mutual funds which allow an investor to save taxes under the section 80C of IT Act.Read on to see the best performing ELSS Mutual Funds
  7. Large cap mutual funds invest in stocks of large companies or stocks with large market capitalizations. Read on to know about the top performing large cap funds
  8. Mid cap mutual fund schemes invest in stocks of large companies or stocks with large market capitalizations. Read on to know the best performing mid cap MFs
  9. A Balanced Fund is a mutual fund which invests its portfolio in a mix of debt and equity instruments. Read on to know the top performing balanced MFs
  10. Liquid funds are mutual fund schemes that invest in short-term debt securities like treasury bills which generate fixed income. Read on to know about the top performing liquid funds.
  11. Income funds are a type of debt funds that invest mainly in government bonds, securities that offer dividends or interest payments. Read on to know more about the best performing income funds, and how to invest in income funds, etc
  12. Growth funds are diversified portfolio with capital appreciation as its prime objective. It comprises of stocks with little or next to no dividend payouts.
  13. Mutual Funds which invest predominantly in technology companies are also popularly known as technology funds. Read on to know more about them.
  14. Relative returns refers to returns as compared to the market index of the country. Absolute return is the return that the mutual fund house gives over time.
  15. Corporate bond funds invest significantly in debt paper issued by companies. Read on to know the risks, returns and suitability of these funds.
  16. Accrual funds are a type of debt mutual funds which typically invest in short to medium maturity papers. Learn more about them here..
  17. Money market mutual fund is basically a marketplace where money is bought and sold. Read more about MMMF,features and risks associated with investment
  18. Income Funds mainly focus on generating regular income for the investors by investing in high dividend generating stocks, government securities, etc. Know more about income funds, how to invest, who should invest, and more
  19. Hedge Fund as a term refers to a heterogeneous group of Investment funds. Read on to know its features and comparison with mutual funds.
  20. Mutual fund schemes can be divided into regular fund plan and direct fund plan. Read on to know how to make a switch between these schemes.
  21. Arbitrage funds are those mutual fund which leverage the price differential between cash and derivative market to generate returns. So technically, an arbitrage fund simultaneously buys shares in cash market and sells it in futures or derivatives market.
  22. Interval Fund is a Mutual Fund wherein the fund house allows to purchase/sell the units only during a particular pre-decided time period. Read on to know more about how interval funds work, who should invest, how to invest, etc.
  23. Dynamic bond funds are debt funds that alter allocation between long-term and short-term bonds to take advantage of changing interest rates. Read on to know more about them and see if they could be a good investment opti
  24. Micro-cap Funds are those which invest in stocks of companies that don't make up to the top 300 companies as per market capitalisation. Read on to know more
  25. Offshore Funds invest in overseas companies and have NRIs as investors. They are under the purview of RBI mutual fund guidelines. Read on to know more.
  26. Monthly Income Plans (MIPs) are mutual funds aiming those who are seeking ways to earn an additional fixed income on their investment. Read on to know more
  27. Pension plans or retirement plans enables you to save towards a fixed income (pension) after retiring. Start contributing now to enjoy a joyous retired life.
  28. If you are looking to diversify your investment portfolio, it might help to look abroad! Global Mutual Funds will help grow your portfolio. Learn more...
  29. Equity mutual funds invest primarily in the stock markets with an aim to generate higher returns. Learn about the different types of equity funds.
  30. Debt funds are ideal investments for conservative investors. Learn more about the different types of debt funds and who should invest in them.
  31. Hybrid funds are mutual funds which invest in both equity and debt funds to achieve the perfect mix of diversification to yield better returns. Click here to know more hybrid funds, its types, who should invest and much more
  32. Investors can invest up to ₹1.5 lakh in ELSS funds to save taxes. Here are the best tax saving mutual funds for FY2017-18.
  33. Liquid Funds are the best way of creating an emergency fund. Wondering how to go about it? let us give you the lowdown on creating your rainy-day stash!
  34. Fund of funds is a mutual fund scheme designed to invest in different mutual funds, allowing the investors to diversify their investments.
  35. Sector funds and thematic funds invest in a particular segment of the economy. Find out if these funds make a good investment option.
  36. Fixed Maturity Plans are debt mutual funds that offer indicative returns for a pre-fixed period of investment. Compare FMPs with FDs & know about its benefits.
  37. Pension plans are important to plan properly for retirement. Find out about the different types of pension plans in India.
  38. Index funds are passive mutual funds that track a particular index. These funds are less riskier than actively-managed funds but also earn lesser returns.
  39. Capital Protection Funds are designed to protect the invested money and earn optimal returns. Find out more about these mutual funds.
  40. Asset allocation funds invest in more than one asset class to help investors diversify and mitigate risks. Find out the benefits of these funds.
  41. Real estate mutual funds invest in commercial and residential properties. Find out how they compare to other mutual funds and if you should invest in them.
  42. Mid-cap equity funds invest primarily in mid-cap stocks, which allows them to earn high returns. Choose these funds if you can withstand the risks.`
  43. Multi-cap equity funds are diversified funds that invest in stocks of different market caps. Find out who these funds are best for.
  44. Small-cap equity funds can be more volatile than other diversified equity funds, but they also have the capability of earning higher returns.
  45. Large-cap funds are equity mutual funds that invest primarily in large-cap stocks. Learn more about these funds and who should invest in them.
  46. An emergency fund can be very useful in times of financial crisis. Find out how you can build an emergency fund and where you should invest it.