Know The Types of Mutual Funds For Better Investment

Last updated on 22 Aug, 2017 | 0 comments

Types of Mutual Funds

There are different types of mutual funds and selecting a mutual fund for investment is a tough job if you don’t possess required knowledge. For investing in mutual funds you have to be clear about two things. Number one what is a mutual fund? And number two what are the types of mutual funds? These are the basics and every mutual fund investor should know it. But, if someone jumps on the bandwagon without the required knowledge he/she would have no other option but crying.

What is Mutual Fund?

Though most of the people understand what a mutual fund is, still the topic demands its definition to be explained to its readers. Mutual Fund is a pool of funds or money aggregated by a fund house from different investors and invested in different security instruments including shares and stocks. From the definition, it is clear that different types of people invest in mutual funds. Hence, their wants are different. That’s why the fund houses serve different types of mutual funds to cater different needs of the people. So, let us know what those types are.

Types of Mutual Funds

If you ask someone about the types of mutual funds, the answer would be tricky. Actually, Mutual Funds can be divided in many ways, like based on structures, based on asset class, based on investment objectives and so on. But, here we are going classify things in a more lucid and simplified way so that the investors can easily go for their required fund. The types of mutual funds shown here under:

1. Equity Funds:

The name itself depicts what type of fund it is. Equity funds topped among all the types of mutual funds, so far as their popularity is concerned. In Equity funds, more than 65 percent of the investments are made in equity stocks of the companies. The investment objective of this kind of fund is primarily long term growth or capital appreciation. You can subdivide Equity funds in terms of market capital- large cap, mid cap and small cap. Both growth and dividend options are available in this fund. The fund houses who manage those funds- often prepare some blended funds out of different market capitals. Say large cap and small cap or small cap and mid cap, like this. Since most of the investments are made in equities, the risk exposure of equity funds is relatively higher. So, the tenure of investment in equity funds should be long, say 5 years or more.

While selecting a mutual fund in this category an investor should evaluate funds from long term return perspective. Because high fluctuations are a common phenomenon within short term say less than a year for this kind of fund. You can invest in Equity Funds through SIP and lump sum both the ways. But for newcomers sometimes it’s advisable to go for SIP style of investment. Because the risk factors can be minimised up to a great extent in the case of SIP investment.

While selecting a mutual fund in equity funds category an investor should evaluate funds from long term return perspective. Because high fluctuations are a common phenomenon within short term say less than a year for this kind of fund. You can invest in Equity Funds through SIP and lump sum both the ways. But for newcomers sometimes it’s advisable to go for SIP style of investment. Because the risk factors can be minimised up to a great extent in the case of SIP investment.

2. Diversified Funds:

It is a variety of the equity funds. As the name implies the investments in this fund are spread over a wide array of securities in different sectors or fields. The primary motive in such type of investment is to reap out the benefit by spreading the risk all over the diversified securities. The fund manager knows that loss cannot gulp all the sectors at a time, so, naturally all the investments cannot go down at a time when the market is suffering. From an investors point of view, this kind of mutual funds is comparatively safe. Though the returns from such funds cannot be expected very high, more or less their growth is sustainable. So, newcomers may try both lump sum and SIP mode of investment for a long term perspective, but SIP mode is advisable.

The fund manager knows that loss cannot gulp all the sectors at a time, so, naturally all the investments cannot go down at a time when the market is suffering. From an investors point of view, this kind of mutual funds is comparatively safe. Though the returns from such funds cannot be expected very high, more or less their growth is sustainable. So, newcomers may try both lump sum and SIP mode of investment for a long term perspective, but SIP mode is advisable.

3. Sector Funds:

These are also an variety of equity funds. Sector funds are in contrast to the diversified funds. Unlike diversified funds, sectoral funds concentrate on securities for investment in a particular sector. Like banking sector fund, IT sector funds, Pharmaceutical Funds and so on. The motto behind the investment of sectoral funds is to tap the best out of the sector within a limited period of time. When the sector is booming the fund grows at top gear and vice-versa. Investors who are experienced and are a close watcher of the market may try sectoral funds. But the risk factors are very high for this type of funds. They are highly speculative. Investors buy such funds when the sector is underperforming and sell them when it’s market is high. If you are a newbie, it’s better to avoid such funds.

Investors who are experienced and are a close watcher of the market may try sectoral funds. But the risk factors are very high for this type of funds. They are highly speculative. Investors buy such funds when the sector is underperforming and sell them when it’s market is high. If you are a newbie, it’s better to avoid such funds.

4. Focused Funds:

Unlike diversified mutual funds, in these types of mutual funds, the fund manager invests funds on a limited number of stocks in a limited number of sectors. Rather than going for 100 stocks the fund managers stick to 20-30 stocks. They pick up every stock with a great level of prudence so that the returns are high. Investors should go through the mutual fund’s portfolio and evaluate things minutely. Since their investment exposure is limited, the risk and return may not match its expectation. New investors in mutual funds should step into this type funds very carefully after properly evaluating things.

Investors should go through the mutual fund’s portfolio and evaluate things minutely. Since their investment exposure is limited, the risk and return may not match its expectation. New investors in mutual funds should step into this type funds very carefully after properly evaluating things.

5. Debt Funds:

These types of mutual funds are meant for them, who are risk avert and like to earn a fair amount of risk-free returnon their investments. In Debt Mutual Funds investments are predominantly made in rated bonds, debentures, government securities, commercial papers and other money market instruments. The primary objective of such fund is the preservation of capital and at the same time generating regular income out of it. Debt Funds are comparatively safer than other funds, but their returns are not guaranteed. Investors with bulk amount may go for debt funds for a medium to long term time horizon.

Debt Funds are comparatively safer than other funds, but their returns are not guaranteed. Investors with bulk amount may go for debt funds for a medium to long term time horizon.

6. Gilt Funds:

In these types of mutual funds, the investments are exclusively made in government securities. Since government bonds and securities don’t have default risk, Gilt Funds are absolutely safe. They are a good investment opportunity for those who are risk averse and want to preserve their capital.

7. Liquid Funds/Money Market Funds:

Money Market Funds or Liquid Funds are meant for investments which can be liquidated at any time when required. The investment periods can be as short as a day. This type of funds invests in short-term debt securities like treasury bills, commercial papers etc. The rate of returns in these funds are not that high in comparison to the other mutual funds, but certainly good from bank deposits. These funds are ideal for corporate houses, institutional investors who want to park their fund in an account other than bank deposits, before investing in some other projects. It is to be noted that money market funds are not for retail investors whose investment corpus is small.

The rate of returns in these funds are not that high in comparison to the other mutual funds, but certainly good from bank deposits. These funds are ideal for corporate houses, institutional investors who want to park their fund in an account other than bank deposits, before investing in some other projects. It is to be noted that money market funds are not for retail investors whose investment corpus is small.

8. Balanced or Hybrid Funds:

Balanced or Hybrid Funds are the blendings of both equity and debt funds. In these funds, the fund manager invests in equity shares as well as debt instruments. A typical Balanced Fund has a weighting of 60% equity and 40% debt funds. The fund managers often specify the minimum and maximum limit for each asset class and rebalance the value of the portfolio in 60-40 style. Balanced funds are made for those investors who are looking for a mixture of safety, income generation and modest capital appreciation. They are ideal for medium to long term investors willing to take moderate risks. Newcomers may go for such type of funds in their portfolio.

These types of mutual funds are made for those investors who are looking for a mixture of safety, income generation and modest capital appreciation. They are ideal for medium to long term investors willing to take moderate risks. Newcomers may go for such type of funds in their portfolio.

9. Index Funds:

Index Funds are often termed as the passively managed funds. Because their portfolios mirror the components of the market These funds invest in the same pattern as popular stock indices like S&P BSE Sensex, SNX Nifty Index etc. Index Funds are relatively safe as these are spread over a broad market segment. The return as well risk is moderate in this type of funds. Inexperienced investors or institutional investors with large portfolio often go for these funds. Investing in index funds are seldom called as an investment on auto pilot.

These types of mutual funds are relatively safe as these are spread over a broad market segment. The return as well risk is moderate in this type of funds. Inexperienced investors or institutional investors with large portfolio often go for these funds. Investing in index funds are seldom called as an investment on auto pilot.

10. Tax Saving Funds:

Investing in Tax Saving Funds offer income tax benefits. Means if you invest in tax saving funds, you will get the same amount of exemption from income for the purpose of tax calculation. They have a locking period of three years. Investors prefer these funds because they save tax and at the same time grow the capital on a long term basis. It’s a good investment opportunity for the newcomers who want to save tax and simultaneously wishes to appreciate wealth. The positive side of this type fund is that their returns are also tax-free.

Investors prefer these funds because they save tax and at the same time grow the capital on a long term basis. It’s a good investment opportunity for the newcomers who want to save tax and simultaneously wishes to appreciate wealth. The positive side of this type fund is that their returns are also tax-free.

11. Exchange Traded Funds:

Exchange Traded Funds (ETFs) are mutual funds with a twist of trading in the exchange on real time basis. These funds follow the same strategies of mutual funds but are structured as investment trusts that are traded on stock exchanges. ETFs track an index, a commodity or a basket of assets. They are backed by the physical holding of the commodities, precious metals, stocks of the companies, currencies etc. The best part of ETF investments is that they can be traded in the same way as stocks in the exchanges, throughout the trading hours and at a real time price. New investors may invest in Exchange Traded Funds preferably through SIP mode.

The best part of ETF investments is that they can be traded in the same way as stocks in the exchanges, throughout the trading hours and at a real time price. New investors may invest in Exchange Traded Funds preferably through SIP mode.

12. Fund of Funds:

This is an investment strategy under which the fund manager invests in other funds instead of directly in bonds, stocks or other financial instruments. Fund of fund strategy tries to achieve the broad diversification and appropriate asset allocation with investments in a variety of fund categories that are all wrapped in one fund. Investing in these types of mutual funds, gives an investor the opportunity to diversify portfolios with different underlying assets which is hardly possible through individual investment.

Investing in Fund of Funds gives an investor the opportunity to diversify portfolios with different underlying assets which is hardly possible through individual investment.

13. Global or International Funds:

Global funds or International funds invest in assets of the companies across the globe including the home country. The company’s performance, as well as the country’s political and economic conditions, has a bearing on the risk and return of the fund. So, in that sense, these are both riskier and safe. It is the composition of the portfolio that matters most- how it reaps the gain and how it minimises.

It is advisable for new investors not to enter the fund in the first instance, rather they should gain more knowledge and experience before buying global funds.