Understand the varied forms in which mutual fund schemes exist and the different investor profiles they are each suited to.
Mutual funds provide investors with one of the easiest and most flexible ways of creating a diversified portfolio of investments. There presently exist a wide array of mutual funds that have been designed keeping in mind the differing risk profiles of investors. From a broad lens, mutual funds can be understood to invest in debt, equities and/ or a mix of both. Further, they are either categorized as open-ended or close-ended schemes. Continue reading to understand what these are.
Open-ended mutual funds allow investors to invest in or enter, redeem and/ or exit the scheme at any point in time as there exists no fixed period of maturity.
In contrast, close-ended mutual funds have a fixed date of maturity. Owing to this, investors are only entitled to invest in these funds while they are in their initial period i.e., the new fund offer (or NFO) period. Investments will be redeemed automatically at the time of the fund’s maturity.
Now that each of the two forms in which mutual funds exist has been made clear, consider the following mutual funds types.
1. Equity Schemes Geared for Growth
This kind of mutual fund is very popular as it permits investors to participate in the stock market. While this kind of investment carries with it high risk it also carries the potential of bringing in the most returns over the long run. Investors who are at their prime earning stage may flock to these investments as they provide potentially superior returns over longer time frames. These schemes can be further split into the following categories.
1.1 Sector-specific Funds – This kind of mutual fund invests money in a specific sector (such as mining or infrastructure) or segment (small-cap, mid-cap or large-cap). Investors who have a high threshold for risk can opt for this. It has the potential to bring in high returns.
1.2 Index Funds – This is best suited for investors hoping to invest in equity-oriented mutual funds but who don’t want to rely on a fund manager. These funds provide investors with returns that are aligned with the index they follow. They are ideal for investors who have a medium threshold for risk.
1.3 Tax Saving Funds – As the name might suggest, these funds provide their investors with tax benefits. Equity-linked saving schemes are worth noting here. They have a 3-year lock-in period and are entitled to tax deductions outlined under Section 80C of the Income Tax Act.
2. Money Market Funds
Such funds direct money towards short-term debt instruments and provide investors with reasonable returns over short time frames. Investors who have a low threshold for risk and wish to place their additional income within a short-term investment should opt for this mutual fund investment.
3. Fixed Income Mutual Funds
This kind of mutual fund directs a major chunk of its money into debt or fixed income instruments such as bonds, debentures or government securities. These investments are tethered to low risks and provide low returns. Investors who have a low threshold for risk and who hope to generate a steady source of income should opt for this kind of mutual fund. It is worth noting here that they are subject to credit risks.
4. Balanced Funds
This kind of mutual fund splits investments between equity and debt. Allocations assigned alter in accordance with market risks. Investors who are on the lookout for moderate returns while exposing themselves to comparatively low risk should consider this.
5. Hybrid Mutual Funds
These mutual funds are also called monthly income plans and operate in a manner similar to that of balanced funds. That being said, the proportion of equity assets is smaller in comparison to them owing to which they are called marginal equity funds. Retired investors who wish to acquire a regular income while incurring comparatively low risks should consider this kind of mutual fund.
6. Gilt Funds
Such funds solely invest in government securities. They are recommended to investors who are risk-averse and don’t want their investments to incur any credit risks. It is worth noting here that they are subject to high-interest rate risks.
Of the aforementioned mutual funds, different types of investors may flock to different funds given their diverse investment goals, capacities for risk, the time they are willing to allocate and the objectives and strategies of the fund in place. Prior to investing in any mutual fund you must do adequate research and discern whether or not it is appropriate for you.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.