Types of Mutual Funds in India

Types of Mutual Funds in India

Over the years, the concept of working for money has evolved. Nowadays, with the modern economic phenomena, you can make your money work for you!

Remember in earlier days, your parents or grandparents hid their money in cupboard shelves. Piggy banks, bank accounts, fixed deposits (FDs) and recurring deposits (RDs) served as the most reliable form to save your money.

Though these modes of savings involve less or no risks, it provides a lesser opportunity to grow your money.

Modern-day investment options like mutual funds offer a flexible and convenient way for creating a diversified investment portfolio.

Let’s check the various types of mutual funds to help you choose the most suitable one for you!

To help you understand the different types of mutual funds present in the market today, we’ve divided them into four parts.

Let’s check the following table to see how we’ve distributed mutual funds.

  • Based on Structure
  • 1) Open-ended
  • 2) Close-ended
  • 3) Interval funds
  • Based on Asset Class
  • 1) Equity Funds
  • 2) Debt Funds
  • 3) Money Market Funds
  • 4) Hybrid Funds
  • Based on Investment Goals
  • 1) Growth funds
  • 2) Income funds
  • 3) Liquid funds
  • 4) Tax-saving funds
  • 5) Fixed Maturity Funds
  • 6) Pension Funds

Mutual funds are broadly classified into three categories based on their structure. These three categories are differentiated primarily on the flexibility to buy/sell the mutual funds. Let’s check the three categories!

  • Open-ended
  • Open-ended mutual funds are those which are typically bought/sold on demand. It does not provide any type of restrictions on the number of units or the time limit for trading. Investors can buy/sell these funds at their convenience. Thus, the unit capital of these funds keeps on changing as per the new entries or exits. Moreover, open-ended funds can even halt new entries for specific reasons such as an inability to manage more than a specific number of investors.

  • Close-ended
  • Close ended mutual funds are launched via an NFO. Once the NFO period ends, investors can no longer purchase close ended funds. These funds are traded in the market and have a fixed maturity period. The actual price of the fund is determined by Net Asset Value. However, the trade price of these funds highly depends on the demand and supply. Close-ended funds provide the highest degree of freedom to fund managers.

  • Interval funds
  • Interval funds resemble the traits of both open-ended and closed-ended funds. These funds are available only during a specific period (decided by the fund house). Interval funds generate higher yields which attract many investors. It allows investors to achieve their short-term financial goals.

  • Equity Funds
  • Equity Mutual Funds or stock funds are the types of mutual funds which invest around 65% of their investment in equity and equity-related instruments. The remaining asset may be invested in debt or money markets. Also, some speciality equity funds strongly target business sectors for instance the health and essential commodities sector.

  • Debt Funds
  • Debt Mutual funds primarily invest in fixed-income securities. It is a less risky and better investment option for people unwilling to compete in the equity market. Examples of debt funds are:
    1) Fixed Maturity Plans (FMPs)
    2) Short-Term Plans (STPs)
    3) Monthly Income Plans (MIPs), etcetera.

  • Money Market Funds
  • Money market funds are mutual funds that invest primarily in near-term instruments with high liquidity. The investors yield high liquidity with very low levels of risks involved with money market funds. These funds are considered as one of the lowest risk involving funds in the spectrum of investments.

  • Hybrid Funds
  • Hybrid mutual funds as the name suggests involves investment in varied asset classes. They involve investing in debt assets, equity, gold or even real estate.

Considering the investment goals of mutual funds, they’re divided into the following six categories.

  • Growth Funds
  • Growth funds are ideally suitable for millennials and people having a hefty amount of money. You might be wondering why is it so? The reason is a considerable amount of money from growth funds is allocated in shares and growth sectors which involves high-risks. Thus, people willing to take a risk with their money are suitable to invest in growth funds.

  • Income Funds
  • Income funds involve low risks and have been historically proven to earn better returns for investors. This type of mutual fund emphasizes the current income. It distributes the money by investing in stocks, bonds or other fixed-income securities.

  • Liquid Funds
  • Liquid funds usually invest in debt instruments and money markets thus, it belongs to the debt fund category. The maximum limit for investing in this fund is 10 lakh INR. The Net Asset Value (NAV) of this type of fund is calculated for 365 days including Sundays.

  • Tax-Saving Funds
  • Tax--saving funds are the type of mutual fund which invests in equity and equity-related securities. It is also widely known as Equity Linked Savings Scheme(ELSS).

    Some amazing features of tax-saving funds are:
    1) Lowest lock-in period compared to FDs.
    2) Capable of generating higher returns compared to other tax-saving instruments. 3) Opportunity to maximise your wealth and save on taxes.

  • Fixed Maturity Funds
  • Fixed maturity funds are a kind of close-ended fund which works on a fixed tenure. The money is invested in stocks, bonds or money markets. Investors who are uncomfortable with the trends of the debt market opt for fixed maturity funds.

  • Pension Funds
  • Solely relying on savings and EPFs won’t ensure your family’s financial stability in future. Pension funds allow you to prepare for financially stable golden years by investing a portion of your money into it. This way you can ensure a healthy and happy future for your family.

  • Why are mutual funds good investments?
  • One of the prime benefits of investing in mutual funds is investors can put a small amount of money and diversify their investment sphere, unlike stocks wherein they would need to invest a large sum to get a similar result.

  • Are mutual funds safer than stocks?
  • Mutual funds and stocks both involve a certain risk based on the type of investment. So, it’s better to do quality research and consult a reliable financial advisory body before investing in either of them.

  • How to choose the best mutual funds for investing?
  • While choosing the best mutual fund certain points must be kept into consideration.
    1) Risks involved.
    2) Return rate
    3) Market situation.
    4) Type of funds
    5) Management of funds, etcetera. It is best to consult reliable financial advisors before investing.

  • How do mutual funds give returns?
  • There are many ways to get returns on your mutual funds. But the three prominent ways through which mutual funds give returns are:
    1) Income from dividends and bonds.
    2) Capital gains.

  • Can mutual funds be withdrawn anytime?
  • Yes. Provided it is an open-ended fund and not closed-ended or ELSS scheme (Tax-Saving fund).

  • How to invest in Mutual Funds?
  • Mutual fund investment can be done via online or offline processes. Nirmal Bang offers an online platform to invest in mutual funds. Submit your documents online and get the account activated. Once the account is active you can start investing in mutual funds.