Markets have corrected, it’s the best time to Invest in mutual funds

Types of Mutual Funds:Considering investing in Mutual Funds?Then it is of utmost importance to understand the various mutual fund types and the benefits they offer. Mutual fund types can be classified based on the following characteristics.

1. Based on Asset Class

a. Equity Funds

Equity funds primarily invest in stocks, and hence go by the name of stock funds as well. They invest the money pooled in from various investors from diverse backgrounds into shares/stocks of different companies. The gains and losses associated with these funds depend solely on how the invested shares perform (price-hikes or price-drops) in the stock market. Also, equity funds have the potential to generate significant returns over a period. Hence, the risk associated with these funds also tends to be comparatively higher.

b. Debt Funds

Debt funds invest primarily in fixed-income securities such as bonds, securities and treasury bills. They invest in various fixed income instruments such as Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, among others. Since the investments come with a fixed interest rate and maturity date, it can be a great option for passive investors looking for regular income (interest and capital appreciation) with minimal risks.

c. Money Market Funds

Investors trade stocks in the stock market. In the same way, investors also invest in the money market, also known as capital market or cash market. The government runs it in association with banks, financial institutions and other corporations by issuing money market securities like bonds, T-bills, dated securities and certificates of deposits, among others. The fund manager invests your money and disburses regular dividends in return. Opting for a short-term plan (not more than 13 months) can lower the risk of investment considerably on such funds.

d. Hybrid Funds

As the name suggests, hybrid funds (Balanced Funds) is an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can either 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. Hybrid funds are suitable for investors looking to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.

2. Based on Structure

Mutual funds are also categorised based on different attributes (like risk profile, asset class, etc.). The structural classification – open-ended funds, close-ended funds, and interval funds – is quite broad, and the differentiation primarily depends on the flexibility to purchase and sell the individual mutual fund units.

a. Open-Ended Funds

Open-ended funds do not have any particular constraint such as a specific period or the number of units which can be traded. These funds allow investors to trade funds at their convenience and exit when required at the prevailing NAV (Net Asset Value). This is the sole reason why the unit capital continually changes with new entries and exits. An open-ended fund can also decide to stop taking in new investors if they do not want to (or cannot manage significant funds).

b. Closed-Ended Funds

In closed-ended funds, the unit capital to invest is pre-defined. Meaning the fund company cannot sell more than the pre-agreed number of units. Some funds also come with a New Fund Offer (NFO) period; wherein there is a deadline to buy units. NFOs comes with a pre-defined maturity tenure with fund managers open to any fund size. Hence, SEBI has mandated that investors be given the option to either repurchase option or list the funds on stock exchanges to exit the schemes.

c. Interval Funds

Interval funds have traits of both open-ended and closed-ended funds. These funds are open for purchase or redemption only during specific intervals (decided by the fund house) and closed the rest of the time. Also, no transactions will be permitted for at least two years. These funds are suitable for investors looking to save a lump sum amount for a short-term financial goal, say, in 3-12 months.

3. Based on Investment Goals

a. Growth Funds

Growth funds usually allocate a considerable 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

Income funds belong 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. They are best suited for risk-averse investors with a 2-3 years perspective.

c. Liquid Funds

Like income funds, liquid funds also belong 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 lakh. A highlighting feature that differentiates liquid funds from other debt funds is the way the Net Asset Value is calculated. The NAV of liquid funds is calculated for 365 days (including Sundays) while for others, only business days are considered.

d. Tax-Saving Funds

ELSS or Equity Linked Saving Scheme, over the years, have climbed up the ranks among all categories of investors. Not only do they offer the benefit of wealth maximisation while allowing you to save on taxes, but they also come with the lowest lock-in period of only three years. Investing predominantly in equity (and related products), they are known to generate non-taxed returns in the range 14-16%. These funds are best-suited for salaried investors with a long-term investment horizon.

e. Aggressive Growth Funds

Slightly on the riskier side when choosing where to invest in, the Aggressive Growth Fund is designed to make steep monetary gains. Though susceptible to market volatility, one can decide on the fund 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 the principal is the priority, Capital Protection Funds serves the purpose while earning relatively smaller returns (12% at best). The fund manager invests a portion of the money in bonds or Certificates of Deposits and the rest towards equities. Though the probability of incurring any loss is quite low, it is advised to stay invested for at least three years (closed-ended) to safeguard your money, and also the returns are taxable.

g. Fixed Maturity Funds

Many investors choose to invest towards the of 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) – which invest 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 one month to five years (like FDs). The fund manager ensures that the money is allocated to 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 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.

4. Based on Risk

a. Very Low-Risk Funds

Liquid funds and ultra-short-term funds (one month to one year) are known for its low risk, and understandably their returns are also low (6% at best). Investors choose this to fulfil their short-term financial goals and to keep their money safe through these funds.

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 to market volatility. You can expect 15% returns, though most high-risk funds generally provide up to 20% returns.

5. Specialized Mutual Funds

a. Sector Funds

Sector funds invest 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. Investors are advised to keep track of the various sector-related trends. Sector funds also deliver great returns. Some areas of banking, IT and pharma have witnessed huge and consistent growth in the 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. A fund manager does not manage it. An index fund 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’ also known as 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 while keeping the cost down at the same time.

d. Emerging market Funds

To invest in developing markets is considered a risky bet, and it has undergone negative returns too. India, in itself, is a dynamic and emerging market where investors earn high returns from the domestic stock market. Like all markets, they are also prone to market fluctuations. Also, from a longer-term perspective, emerging economies are expected to contribute to the majority of global growth in the following decades.

e. International/ Foreign Funds

Favoured by investors looking to spread their investment to other countries, foreign mutual funds can get investors good returns even when the Indian Stock Markets perform 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 (e.g., 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

Despite the real estate boom in India, many investors are still hesitant to invest in such projects due to its multiple risks. Real estate fund can be a perfect alternative as the investor will be an indirect participant by putting their money in established real estate companies/trusts rather than projects. A long-term investment 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

These funds are 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, however, may not be 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 unfavourable 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 where 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. It is nothing but selling your shares when the stock goes down, only to repurchase them 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 based on 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 also 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 new world of investment prospects, enabling investors to gain extensive exposure to stock markets abroad as well as specialised 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. ELSS funds are equity oriented mutual funds which allow an investor to save taxes under section 80C of the IT Act. Read on to see the Top 10 Best ELSS Mutual Funds in 2020.
  2. Invest in Best SIP Plans through ClearTax. Get higher returns than any other tax saving schemes. Know about top Systematic Investment Plans / SIP Mutual Funds 2020 in India.
  3. Best Debt Mutual funds 2020 : As as investor, you might always be on a lookout for the best debt funds to invest your money. Read more to find out the critical aspects which you need to consider before making a final decision.
  4. Invest up to ₹1.5 lakh in ELSS funds to save taxes under Section 80C, Income Tax Act. Learn more about the best tax saving mutual funds in 2020.
  5. A hybrid mutual fund invests in both debt and equity-linked instruments. These funds can further be classified based on their equity exposure.
  6. Best Tax Saving Mutual Funds - Invest up to ₹1.5 lakh in ELSS funds to save taxes under Section 80C, Income Tax Act. Learn more about the best tax saving mutual funds in 2020.
  7. Perpetual SIPs do not have a fixed investment period. Perpetual SIPs continue until the time you wish to invest. Perpetual SIPs are best suited for young investors as they generally invest with a long-term horizon. They can avoid filling and submitting SIP renewal forms. If you want to opt for perpe
  8. Investors can invest up to ₹1.5 lakh in ELSS funds to save taxes. Read this article to know about best tax saving mutual funds performance, returns for FY 2018 - 19.
  9. There are over a thousand mutual funds to choose from. Explore the 5 must-know types of mutual funds that you can invest in.
  10. Investing in mutual funds will take you a step closer to planning your dream vacation. Mutual funds are also a great way to start your investment journey.
  11. Aggressive hybrid funds fall in the category of hybrid schemes. These take exposure to both debt and equity securities in proportions specified in the scheme’s investment objective. As compared to plain vanilla balanced funds, these funds have differences in asset allocation.
  12. Best SIP Plans 2020 : Invest in Best SIP Plans through ClearTax. Get higher returns than any other tax saving schemes. Know about top Systematic Investment Plans / SIP Mutual Funds 2020 in India.
  13. 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.
  14. 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!
  15. 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.
  16. Best Multi cap funds invest in equity shares of companies which belong to different market capitalization like large-cap, mid-cap & small-cap stocks in the portfolio in a specific proportion. Read this article to know about best multi-cap funds of 2020.
  17. Best Debt Mutual funds 2020 : As as investor, you might always be on a lookout for the best debt funds to invest your money. Read more to find out the critical aspects which you need to consider before making a final decision.
  18. Best Small cap mutual funds invest in stocks of companies with small market capitalization. Read about best small cap mutual funds in India for 2020.
  19. Best ELSS funds are equity oriented mutual funds which allow an investor to save taxes under section 80C of the IT Act. Read on to see the Top 10 Best ELSS Mutual Funds in 2020.
  20. Best Large cap mutual funds invest in stocks of large companies or stocks with large market capitalizations. Read on to know about the best large cap funds in 2020.
  21. Best Mid-cap mutual fund schemes invest in stocks of large companies or stocks with large market capitalisation. Read on to know the best performing mid-cap mutual funds in 2020.
  22. Best Balanced Fund is a mutual fund which invests its portfolio in a mix of debt and equity instruments. Read on to know about the best balanced Mutual funds in 2020.
  23. Fixed Maturity Plans are debt funds that are close-ended, which means that investments can be made only during the time of an NFO. Read on to know more.
  24. An equity fund is a mutual fund which invests equity shares of companies based on fund's investment mandate. Read on to know how to choose the best equity mutual funds of 2020.
  25. Best short term mutual funds 2020: Short term mutual funds offer a maturity from a minimum of 15-91 days or below that, having historically delivered up to 9% returns. Here are the best short term funds available currently in 2020.
  26. 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
  27. Growth funds are diversified portfolio with capital appreciation as its prime objective. It comprises of stocks with little or next to no dividend payouts.
  28. Mutual Funds which invest predominantly in technology companies are also popularly known as technology funds. Read on to know more about them.
  29. 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.
  30. When it comes to the right time to invest in a mutual fund, several things need to be kept in mind. Read on to know more.
  31. Corporate bond funds invest significantly in debt paper issued by companies. Read on to know the risks, returns and suitability of these funds.
  32. To select the best mutual funds suiting your financial goals and income is tricky. Check out 4 tips from ClearTax to make it easier for you.
  33. Accrual funds are a type of debt mutual funds which typically invest in short to medium maturity papers. Learn more about them here..
  34. Money market mutual fund is basically a marketplace where money is bought and sold. Read more about MMMF,features and risks associated with investment
  35. 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
  36. Hedge Fund as a term refers to a heterogeneous group of Investment funds. Read on to know its features, benefits, working and comparison with mutual funds.
  37. 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.
  38. 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.
  39. 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.
  40. 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
  41. 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
  42. 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.
  43. 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
  44. 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.
  45. 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...
  46. Equity mutual funds invest primarily in the stock markets with an aim to generate higher returns. Learn about the different types of equity funds.
  47. Debt funds are ideal investments for conservative investors. Learn more about the different types of debt funds and who should invest in them.
  48. 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
  49. Investors can invest up to ₹1.5 lakh in ELSS funds to save taxes. Read this article to know about best tax saving mutual funds performance, returns for FY 2018 - 19.
  50. 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!
  51. Fund of funds is a mutual fund scheme designed to invest in different mutual funds, allowing the investors to diversify their investments.
  52. Sector funds and thematic funds invest in a particular segment of the economy. Find out if these funds make a good investment option.
  53. 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.
  54. Pension plans are important to plan properly for retirement. Find out about the different types of pension plans in India.
  55. 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.
  56. Capital Protection Funds are designed to protect the invested money and earn optimal returns. Find out more about these mutual funds.
  57. Asset allocation funds invest in more than one asset class to help investors diversify and mitigate risks. Find out the benefits of these funds.
  58. 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.
  59. 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.`
  60. Multi-cap equity funds are diversified funds that invest in stocks of different market caps. Find out who these funds are best for.
  61. Small-cap equity funds can be more volatile than other diversified equity funds, but they also have the capability of earning higher returns.
  62. 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.
  63. 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.