Different types of Mutual Funds & Why to invest in them

Gaurav Chakraborty
Gaurav Chakraborty
gauravc@orowealth.com

The reason the mutual fund is the best tool for investment is because of its versatility in catering to the demands of different people. Some want higher returns, some are risk-averse, while some are in search of regular returns, there is a mutual fund for each one of them, just like tailor-made. The earlier concept of pooling funds together and earning a profit on that basis has become outdated, as the concept is the same but the end objective has grown to another level. In order to see different types of mutual funds, it is essential to know its classification.

A. Mutual fund based on the asset class. i.e. in which assets the funds of such mutual fund are invested into.

1. Equity funds. As the name suggests equity is the primary target of such mutual fund, aka stock funds. This fund invests directly in shares of listed companies and the returns are based on the performances of such companies. The reason for investing in an equity fund is extra-ordinary growth and returns. Compared to other mutual funds, equity fund provides with substantial returns, albeit higher risk is its tag-along partner.

2. Debt fund. Theses fund invest heavily in safe and fixed income securities like government bonds, gilt-edged securities, treasury bills, etc. The basic objective of these funds is being small but regular return along with the safety of the principal amount. As a result of low risk, this fund is primarily for those with low-risk appetite and need for regular returns.

3. Money market Funds. These funds invest in money market instruments such as the certificate of deposits, T-bills, commercial papers, etc. issued by banks, government or corporates on a very short term basis. Therefore investors who are in need to park fund for a lesser amount of time can avail the benefit of money market fund in order to secure the money and avail interest as well as capital appreciation with minimum risk.

4. Hybrid Funds. Funds with an ideal mix of debt and equity are known as hybrid funds. Hybrid funds maintain a ratio though which they invest in debt as well as equity instruments and provide investors with both the flavors of lower risks at the same time higher returns. The reason to invest in this fund can be stable income and higher returns from equity with a slight amount of risk.

B. Mutual fund based on the entrance. i.e. When can you enter in such funds?

1. Open ended funds. These are funds with no limitation to entry or exit, therefore an investor can buy or sell any number of units of a mutual fund based on the ongoing NAV (net asset value). An open ended scheme is advantageous for investors who invest at regular intervals.

2. Close ended funds. In contrast to an open-ended scheme, in this fund the unit capital to be invested is fixed (face value) and there is a pre-determined restriction for sale of units. New fund offer (NFO) is a part of close-ended fund where at a given deadline investor has to invest. On account of restriction for exit, SEBI requires the fund to provide opportunities for exit such as listing of unit or repurchase by the fund themselves.

3. Interval funds. Similar to hybrid fund, interval fund has the characteristics of both close as well as open ended schemes. This fund gives the option to investor to purchase or sale of units at a pre-determined interval. Lump-sum investment is the reason why one must choose interval fund.

C. Type of mutual fund based on investment objective.

1. Growth Fund. This is a fund which primarily invests in shares of companies which are growing in nature. Capital appreciation is the main objective of growth funds as profits earned are re-invested in the fund. This fund is ideal for risk taking investors as a result of its extra-ordinary nature of returns. However on account of investment in non-proven company, the risk factor is at all-time high.

2. Income fund. Long dated securities like government securities, certificate of deposits, corporate bonds, debentures etc. are the primary target of these funds. With fixed return and low risk profile this fund becomes ideal for risk averse investors. Tax benefit, fixed returns and high liquidity are the reason investors should watch out this fund.

3. Liquid Fund. Debt and money market instruments are the basis of liquid funds with maximum investment cap of Rs. 10 lakhs only. One more uncommon feature of liquid fund is the calculation of NAV unlike other funds is calculated for the whole year i.e 365 days. If short term parking or creation of emergency fund is your question then liquid fund is the best solution for investment.

4. Aggressive growth fund. As the name suggests, this fund is inclined more towards the riskier side of investment. Based on that, the expectation of the return is massive. Speaking in terms of risk, if market Beta is 1, AGF Beta will hover somewhere around 1.1o or higher. Therefore Millennial with no liabilities or higher risk taking capacities can call this fund tailor-made for them.

5. Capital protection fund. If the above fund was for risk embracing, this one is for the risk-averse crowd. The basic criteria for this fund being investment of majority portion in debt or money market instruments, only certain smaller portion goes into equity. The returns hover around 12-13% with optimum capital protection, however, fund being close-ended possess a three-year lock-in.

6. Fixed Maturity fund. The targeted instruments mature at a fixed amount of time which ranges from 30 days to 5 years. This fund is best suited to investors with a timely requirement of funds with a considerable return on investment.

7. Pension fund. Similar to schemes provided by bank or post offices, pension fund solely targets on returns at the end of its tenure to investors whether one time or regular and provide them with slightly better returns compared to post office or bank schemes.

D. Mutual Fund with specialized functioning.

1. Index Funds. This is a passive fund, i.e. fund not managed by fund manager but by the performance of the underlying index. The index is nothing but a benchmark (Nifty 50 or BSE Sensex) whose performance is directly linked with the performance of an index fund. This is simply copying the index and its investment and thereby its performances, which makes this fund ideal for investors who believe in the capability of the market rather than a fund manager.

2. Sector funds. These funds are sector specific, where the rise or fall of that specific sector determines the outcome of the fund. Pharmaceutical, IT, banking, real estate etc like various options are available for investors in sector funds. Therefore these type of funds are best suited for investors who possess knowledge about any specific sector and believe in their rise in future.

3. Fund of funds. To put it simply, this is a fund which further invests into different funds to achieve diversification at lower costs. Therefore a single fund receives the benefit of multi-manager base along with benefits of different funds at one go. The reason to invest in such fund should be to achieve diversification in a mutual fund at first instance.

4. Commodity focused fund. Another specialized fund which focuses on commodity or business dealing in commodities. In India gold is the only commodity which allows mutual fund to invest into, however funds can invest in companies which deal into the commodity market. A tailor-made fund for investors seeking investment indirectly in commodity market.

5. Exchange traded fund. This is a fund which is traded just like share trading in stock exchanges. ETFs give wide exposure to different sectors of the market along with facility to trade them instantly at a price which remains volatile throughout the day. A mutual fund that can be traded can attract investors who want the decision making of entry exit with themselves along with the benefits of mutual fund.

Gaurav Chakraborty
Gaurav Chakraborty
gauravc@orowealth.com

Gaurav is an engineer-turned-digital marketeer. Also a personal finance blogger with experience in financial planning and crowdfunding sector. He is a part of the Marketing team at Orowealth.

1 Comment
  • Avatar
    Rahul Patel
    Posted at 14:49h, 29 August Reply

    Mutual funds may be classified based on the securities they invest in. Thanks for the types of mutual funds.

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