There are various types of mutual funds in India today.
The Mutual Fund industry has come a long way in our country
and today you have the option to choose from a variety of categories to invest
in mutual funds to achieve your objectives.
Unfortunately, at the same time though due to the various
types of mutual funds available, you could also be confused where to make your
mutual fund investment.
With so many types of mutual funds in India today, it has
become all the more important to resort and pay heed to professional advice
when it comes to investing in mutual funds.
With mutual funds, knowing where not to invest is as
important as knowing where to invest.
Funds based on maturity period
Open
ended mutual funds
With open ended mutual funds, you can invest and redeem as
and when you wish to.
Open ended mutual funds therefore provide you with the
benefits of liquidity, flexibility and the opportunity to make decisions
relating to investing and redeeming based on prevailing market conditions.
Close ended mutual funds
With close ended mutual funds, you can invest only during
the allotted time period.
Once the period expires, you cannot then invest in the fund.
Once invested you cannot redeem your investments for a
specific period.
Close ended mutual funds come with a maturity period for 3-6
years.
Once your funds mature, you can either redeem your
investments or let them stay in the fund as they are.
Interval
Funds
Interval funds are a mixture of open and close ended mutual
funds.
They mostly operate as close ended mutual funds though.
Interval funds can trade on the stock exchanges.
Funds
based on Investment Objectives
Equity
Mutual Funds
An equity mutual fund is any mutual fund that by SEBI
regulations needs to invest a minimum of 65% of its overall portfolio into
equities.
If you are investing in an equity mutual fund then you are
basically investing in stocks of different companies.
Of all the different types of mutual funds, equity mutual
funds have the potential to give you the highest returns.
Equity mutual funds are best suited for investors with long
term goals and a high-risk appetite.
Equity mutual funds are best form of investment since they
can also beat inflation in the long run if invested well and with a plan in
place.
Debt
Mutual Funds
Debt mutual funds invest in fixed returns instruments such
as corporate bonds, government securities, treasury bills and commercial papers
and so on.
Debt mutual funds are less volatile than equity mutual
funds.
They are most suited for investors with a low risk appetite
and for short term goals.
Debt mutual funds can be seen as an alternative to bank
fixed deposits.
You have to keep in mind that merely because debt mutual
funds are less risky it does not mean they do not carry any risk at all, be it
equity mutual funds, debt mutual funds or any other type of mutual fund,
returns from mutual funds are not guaranteed.
Hybrid
Mutual Funds
Hybrid mutual funds invest in a mix of equity and fixed
income instruments.
Their main purpose is to find a balance between the high
returns of equities and stability of fixed income instruments.
Hybrid mutual funds are more suited to conservative and
first-time investors in mutual funds.
Liquid
Mutual Funds
As the very name suggests, liquid mutual funds are highly
liquid in nature.
Liquid funds invest in debt and money market instruments
such as government bonds and treasury bills with a maturity period of up to 91
days.
These funds can be utilized for short term goals or even to
do a Systematic Transfer Plan into an equity mutual fund.
These funds can also be utilized to park money for
emergencies and can also work as a better alternative to a bank savings
account.
Gilt
Mutual Funds
Gilt mutual funds invest in government securities.
Although gilt mutual funds do not carry a credit risk, they
however do carry interest rate risks.
They are affected by fluctuating interest rates.
Other
Mutual Funds
Index
Funds
Unlike other mutual fund schemes, index funds are not
actively managed but rather passively managed.
An Index fund would track a particular index such as Nifty or
Sensex.
To put it simply, index funds would invest in the same stocks as the index has.
In an equity mutual fund, the primary objective is to beat
the benchmark but in an Index fund the primary objective is to match the
performance of the Index.
The difference between fund performance and index is known
as tracking error.
Lower the tracking error the better.
Tax
Saving/ELSS Mutual Funds
Tax saving/elss mutual funds allow you an exemption of up
to 1,50,000 in your taxes under section 80c of the income tax act.
Tax saving funds have the lowest lock in period of 3 years
among the instruments available for tax exemption.
Elss funds need to invest a minimum of 80% of its overall
portfolio into equities.
In case of sip plans, you have to keep in mind that each sip
instalment completes 3 years in case you wish to redeem.
Unlike other mutual fund schemes, elss mutual funds are
regulated by the government of India and not SEBI.
Thematic
and Sectoral Mutual Funds
Thematic mutual funds
A Thematic Mutual Fund as the name suggests follows a
particular theme when investing.
A Thematic Mutual Fund can invest across various sectors
that fall within one particular theme.
It is far more diversified than a Sectoral Mutual Fund
since it is not restricted to any one particular sector.
An infrastructure fund is an example of a thematic mutual
fund, it invests only in stocks that are considered to be a part of the
infrastructure story.
An infrastructure fund can invest in companies belonging to
the paint (chemicals), cement, banks, etc sectors
Therefore, infrastructure is the theme in this example.
Sectoral mutual funds
A Sectoral
Mutual Fund as the name suggests invests only in one particular sector.
It is less
diversified than a Thematic Mutual Fund since it is restricted to just one
particular sector.
Think
of Sports as a theme and various disciplines like Football and Basketball like
sectors. Sports constitute both Football and Basketball but Football does not
constitute Basketball and Basketball does not constitute Football.
In the same
manner a Thematic Mutual Fund constitute various sectors but it is not
necessary that various sectors fall within the same theme.
Think of a
Pharma mutual fund scheme, it can only invest in companies belonging to the
pharmaceutical sector.
Solution
based Mutual Funds
Solution based mutual fund schemes are marketed around
being able to provide you with solutions to a particular aspect like say your
retirement or your child’s future.
These mutual funds are nothing but merely equity and
hybrid mutual funds with different names.
There is nothing unique about the investing strategies
adopted by solution based mutual funds.
The drawback of these funds is that they usually come in
with a lock in period.
For example, for a retirement based mutual fund the lock
in period is until you reach 60 years or 5 years from the date of investment,
whichever is earlier.
For a child based mutual fund the lock in period is until
your child turns 18 or 5 years from the date of investment, whichever is
earlier.
You cannot redeem your investments when the lock in
period has not expired even if you feel your fund is underperforming and
therefore needs shifting.
The only positive point of solution based mutual funds is
that if you are someone who is unable to handle volatility and struggles with
discipline then these could be a good fit since they come with a lock in period
with no chance of redemption as long as the lock in period is in existence.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
