Types of mutual funds

[ecis2016.org] Mutual funds can be divided into several categories based on structure, asset class, investment objective, speciality and risk

Those interested in making money through mutual fund investments should be aware of the different types available in the market, to be able to select the type(s) that suit their individual needs. This guide will help you understand all the types of mutual funds.

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Types of mutual funds based on the structure

Depending on their structure, mutual funds can be of the following types:

Open-ended mutual funds: It has no fixed maturity period. Thus, it allows you to enter, exit and redeem at any point in time. Such mutual funds would allow you to stay invested for as long as you want.

Closed-ended mutual funds: These have a fixed maturity period and do not allow you the freedom to enter, exit and redeem as and when you like. An investor can enter only during the initial offer period. Closed-ended mutual funds are listed on stock exchanges.

Interval funds: Carrying features of both, open and closed-ended mutual funds, these are opened for the repurchase of shares at different periods during the fund tenure.

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Types of mutual funds based on asset class

Depending on the asset class, mutual funds can be of the following types:

Equity funds: Your money is invested in stocks of different companies. A high-risk high-gain investment option, equity mutual funds are for long-term wealth creation. Gains from such funds would be directly proportional to the performance of the company stock in which investment was made.

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Debt funds: Designed for investors with a low-risk appetite, these invest in fixed-income securities like treasury bills, securities and government bonds. The returns are not as high as equity mutual funds.

Money market funds: Another safe investment option, these invest your money in short-term debt instruments like treasury bills and commercial papers and provide regular dividends as returns.

Balanced or hybrid funds: In this scheme, your fund manager will invest your money in equity, debt and other asset classes, depending on the investment objective of the scheme. Designed to offer a diversified investment portfolio, hybrid mutual funds involve medium risk.

Types of mutual funds based on the investment objective

Depending on the investment objective, mutual funds can be of the following types:

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Growth funds: These are perfect for high-risk appetite people, looking for long-term investments with high returns. With that focus, growth funds invest in equities.

Income funds: A safe investment option, they provide regular income by investing in fixed-income instruments such as bonds and debentures.

Tax-saving funds: A highly popular investment option among the salaried class, Equity-Linked Saving Schemes (ELSS) are great options to save taxes, apart from generating returns in the range of 14%-15%. However, they are high risk, too.

Capital protection funds: A safe bet for an investor, these divide your money between fixed-income instruments and equity markets and generate moderate returns. They work on the basic objective of protecting your principal amount.

Fixed maturity funds: A close-ended plan, these invest in debt and money market instruments like bonds and securities for a fixed period, ranging between one month and five years.

Pension funds: A long-term investment option, these are meant for people looking for regular returns on retirement. Managers of pension funds typically divide your investment in equities and debt markets, making it both, safe and high yielding.

Liquid funds: Extremely low-risk, these invest your money in short or very short-term instruments such as treasury bills and commercial papers. Offering moderate returns, liquid funds are designed for people looking for short-term investments.

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Types of mutual funds based on speciality

Depending on the speciality, mutual funds can be of the following types:

Sector funds: These invest your money in a particular sector. The return is linked to the performance of the sectoral market and thus, is high risk.

Index funds: These invest in stocks that represent a particular index on an exchange like NSE Nifty or BSE Sensex. Index funds are not popular in India due to limited return potential.

Fund of funds: Also known as a multi-manager investment, the umbrella portfolio has different underlying portfolios from other mutual funds. Investing in just one fund gives you a diversified portfolio.

Emerging market funds: These bet on the potential of emerging markets and try to exploit the same while keeping the principal investment low. However, these are high-risk.

International funds: Investors have the option to make money through international mutual funds since they offer investments in companies located in other parts of the world.

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Global funds: Although similar sounding, these are different from international funds. Unlike international funds, global mutual funds invest in both, domestic and international markets.

Real estate funds: These could be considered sector funds, as they invest only in real estate companies. Returns are directly proportional to the performance of the sector and the particular company stock.

Commodity-focused stock funds: These invest in companies with direct exposure to gold, oil, silver, solar and wind energy. In India, commodity mutual funds are not popular yet.

Market-neutral funds: Pretty low risk, these invest in treasury bills, equity-traded funds and securities. They provide you with a fixed growth option.

Inverse/leveraged funds: Operating unconventionally, these help the investor earn profits when the markets fall. Meant for investors with a very high-risk appetite, inverse funds sell your shares when the stock goes down and buy them back when the stock price is even lower.

Asset allocation funds: Here, the portfolio manager distributes your investment in debt and equity to optimise returns. Asset allocation funds have two types: the target date fund and the target allocation fund.

Exchange-traded funds: Traded on the stock exchange, these give investors extensive exposure to stock markets abroad and specialised sectors. These are a mix of open and closed-ended mutual funds.

Gild fund: Ideal for risk-averse investors, these invest only in government securities. Such MFs are, however, subject to high-interest rate risk.

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Types of mutual funds based on risk

Depending on the risk involved, mutual funds can be of the following types:

Very low risk: For risk-averse investors, very low-risk mutual funds like liquid funds are recommended. However, they also offer comparatively lower returns.

Low risk: Liquid, ultra-short-term and arbitrage funds are considered low-risk mutual funds, offering an average return of 6% to 8%.

Medium risk: The risk factor in such mutual funds is higher than the previous two types and the return is also higher, in the range of 9% to 12%.

High risk: Inverse mutual funds are meant for investors with a high-risk appetite. Understandably, they also offer higher returns in the range of 15% to 20%.

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