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Last Updated : Dec 03, 2019 03:56 PM IST | Source: Moneycontrol.com

What are the different types of mutual funds in India?

Mutual Fund Types: Learn about mutual funds & the different types of Mutual Funds available in India. Click here to read more on various types of MF at Moneycontrol.

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Representative image

A mutual fund is a way to pool in money for investment in a variety of underlying securities. A mutual fund house issues unit of mutual funds to investors in proportion to their investment money. The objectives of the mutual fund are disclosed in the offer document. The profits or losses are shared by investors in proportion to their investments. A mutual fund must be registered with the Securities and Exchange Board of India (SEBI) before it can collect funds from the public.

A mutual fund is a popular investment option as it provides access to a large portfolio of assets. Some of the mutual funds also provide higher returns than the ones from conventional investments. A mutual fund is professionally managed by a fund manager who takes all the decisions in line with the financial goals of the investor.

There are various types of mutual funds on the basis of the maturity period and investment objectives. Let’s take a look at the various types of mutual funds

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Types of Mutual Funds Based on Asset Class


On the basis of the type of underlying asset in which investment is made, the following are the various types of mutual funds:

Equity Schemes: The aim objective of these schemes is to provide capital appreciation over a medium to long- term investment horizon. As per the regulations of SEBI, an equity mutual fund scheme should invest at least 65% of the scheme’s assets in equities and equity-related instruments. As the investment is made in equity products, these funds are comparatively high risk.  This scheme is suited for investors who have a good risk appetite and are looking for capital appreciation over a long-term investment horizon.

Debt Schemes: This type of mutual fund scheme invests in fixed income instruments, such as bonds issued by the government and corporate, debt securities, and money market instruments, etc.  These funds have a fixed rate of interest which allows the investors to be aware of the returns right at the time of investment. It is a great investment option for investors who want to play it safe but want steady returns.

Hybrid Scheme: These schemes invest in equities and fixed income securities in the proportion indicated in their offer documents. The aim of these schemes is to provide both growth and regular income.  This is a great option for investors looking for moderate growth. Typically, the distribution between equity and debt instruments is in a 40:60 ratio. However, these funds are subject to market volatility as equity instruments are part of the investment portfolio.

 

Types of Mutual Funds Based on the structure


On the basis of structure, there are three types of mutual funds in India:

Open-Ended Funds:  These schemes are available for subscription and repurchase on a continuous basis. There is no fixed maturity period. Investors have the option to buy and sell units at NAV which is declared on a daily basis. The past performance of these assets can be tracked which allows the investor to make a well-informed decision. If the investor is looking for liquidity alone, these funds are a great option.

Close-Ended Funds: In a close-ended mutual fund, a fixed number of units are issued. These units are traded on the stock exchange. A closed-end fund functions like an exchange-traded fund. Units of a close-ended mutual fund are available for purchase during the NFO period. The units can be traded at premiums or discounts to their NAVs.  Redemption is allowed only after the maturity of the fund which is typically between 3 to 7 years. The main feature of this scheme is that provides stability. This allows the portfolio managers to build a steady asset base and devise the right investment strategy.

Interval Funds: This is a hybrid fund that has the characteristics of both open-ended and close-ended funds. These funds can be purchased or sold only at specific intervals as per the discretion of the fund house. The fund remains closed for the rest of the time. This works best for investors who want to have a lumpsum amount of savings in a short period of time.

 

Types of Mutual Funds based on Investment


Following are the types of mutual funds in India based on the investment strategy:

Growth Funds: These funds apportion a large portion of the investment money in shares. This is a good option for investors who want to invest their surplus money and have a risk appetite.

Income Funds: This fund scheme invests the money in bonds, certificates of deposits and securities among others. This scheme is best suited for risk-averse individuals who have a few years of experience in investment.

Liquid Funds: This scheme invests in debt instruments and money market instruments that have a tenure of up to 91 days. The investor can invest only up to Rs 10 lakhs. The NAV of the liquid fund is calculated for 365 days, whereas the NAV of other funds is calculated only on the basis of business days.

Tax-Saving Funds: Equity Linked Saving Scheme is one of the most popular tax saving schemes. The lock-in period of these funds is 3 years. It also offers a good rate of return. This scheme is best for long-term and salaried investors.

Aggressive Growth Funds: These funds help you to make a huge monetary gain by investments in the equity market. You can use beta which is a tool to gauge the fund’s movement in comparison with the market. However, this fund is very susceptible to market volatility.

Capital Protection Funds: These funds invest a large portion of the money in bonds and certificates of deposits and the balance in equities. However, the fund offers small returns. This scheme can provide full protection to your capital.

Fixed Maturity Funds: As the name suggests, this scheme invests for a maturity period. The investment is primarily in bonds, securities, money market etc. The maturity period is between 1 month to 5 years.

Pension Funds: A pension fund allows you to build a corpus for your retirement. The pooled in money is invested in a variety of assets through the pension fund. Some of the common pension plans in India are unit-linked which invest in both equity and debt instruments. The government has also launched the National Pension Scheme which invests either 100% of the investment amount in government securities or 100% of the investment amount in debt securities (other than government securities), or a maximum of 75% in equity.

 

Types of Mutual Funds based on Risk


As is the case with most investments, mutual funds are subject to various risk factors. On the basis of the level of risk involved in the investment, the following are the types of mutual funds in India:

High-risk Funds

Most equity schemes are high-risk funds. These work best for investors with a huge risk appetite who want huge returns. These funds need active fund management. They are subject to market volatility. You can expect 15% returns, though most high-risk funds generally provide 20% returns and 30% in some other cases.

Medium-risk Funds

Most debt funds fall into this category. The risk factor is medium as the majority of the investment is in debt and the rest in equity funds. The NAV is not that volatile. The and the average returns are between 9-12%. These work best for investors who do not have a very high-risk appetite and want steady returns.

Low-Risk Funds

If the investor is unsure about the investment decision or there is a sudden crisis in the market, it is recommended to invest the money in either one or a combination of liquid, ultra-short-term or arbitrage funds. The returns offered are low, but the risk associated with these funds is also very low.

Very Low-Risk Funds

Examples of this category of funds are liquid funds and ultra-short-term funds. These investments are not risky at all. However, the returns from this scheme are very low. These work best when the investor needs to fulfil a short-term financial goal and wants a low-risk option.

 

Specialized types of Mutual Funds in India


Here are the special types of mutual funds in India:

Gilt Funds

These funds invest exclusively in government securities. There is no risk of default from these investments. However, the NAVs of these schemes are susceptible to change in interest rates and other economic factors.

Index Funds

These funds replicate the portfolio of a particular index such as the BSE Sensitive index (Sensex), NSE 50 index (Nifty), etc. These schemes invest in securities in the same weightage comprising an index. The increase or decrease in the NAV is in accordance with the rise or fall in the index. However, it does not mirror the index exactly by the same percentage due to some factors known as “tracking error”.

Fund of Funds

A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.

Foreign Funds

Foreign Mutual Funds are favored by investors seeking to distribute their investment to other nations. This can deliver excellent yields to i

Here are the special types of mutual funds in India:

Gilt Funds

These funds invest exclusively in government securities. There is no risk of default from these investments. However, the NAVs of these schemes are susceptible to change in interest rates and other economic factors.

Index Funds

These funds replicate the portfolio of a particular index such as the BSE Sensitive index (Sensex), NSE 50 index (Nifty), etc. These schemes invest in securities in the same weightage comprising an index. The increase or decrease in the NAV is in accordance with the rise or fall in the index. However, it does not mirror the index exactly by the same percentage due to some factors known as “tracking error”.

Fund of Funds

A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.

Foreign Funds

Foreign Mutual Funds are favored by investors seeking to distribute their investment to other nations. This can deliver excellent yields to investors even when Indian stock markets don't perform well. An investor can use a hybrid strategy (say, 60% in national equities and the remainder in overseas funds) or a feeder strategy (receiving local funds to position them in foreign stocks) or a theme allocation (such as Gold Mining).

Global Funds

Global funds are quite distinct from International Funds. While a global fund invests primarily in markets around the world, it invests in securities in India. On the other hand, international funds focus exclusively on foreign markets. Global funds can be diverse and universal in strategy due to the distinct policy, market and currency differences across the world. It works as a break against inflation. The long-term returns from these funds have been historically high.

Real Estate Funds

Despite the real estate boom in India, owing to numerous hazards, many are cautious of investing in such projects. Real estate funds can be an ideal option for such investors. In these funds, the investor is only an indirect participant who places the money in established property firms/trusts instead of real estate projects. These funds demand a long-term investment. These funds also negate hazards and legal difficulties associated with buying a property to use it as an investment vehicle.

Commodity-focused Stock Funds

This is one of the types of mutual funds which is a great option for investors with adequate risk appetite who are seeking to diversify their portfolio. Commodity-Focused funds provide an opportunity for the investor to dabble in various sectors of industry. However, the returns are not regular and are either based on stock company performance or commodity performance itself. Gold is the only commodity where mutual funds can directly invest.

 

FAQs


 

What is a Fund of Funds (FoF) scheme?


FoF is one of the types of mutual funds that refers to a scheme that invests primarily in other schemes of the same mutual fund or other mutual funds. Such schemes enable investors to achieve greater diversification through one scheme. The risk profile is reduced as the investments are made across different funds.

 

I have invested in a debt mutual fund scheme. Can I change the nature of the scheme from debt to equity?


It is possible to change the nature of the scheme. However, SEBI has laid down certain regulations which need to be complied with for affecting such a change:

Any changes in the fundamental attributes of the scheme such as the structure, investment pattern, etc., can be changed only when written communication is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation. The information should also be published in a newspaper published in the language of the region where the head office of the mutual fund is situated. In case the unitholders do not want to continue with the scheme, they have the option of exiting the present scheme at prevailing NAV without bearing exit load.

 

How can I know where the mutual fund scheme has invested the investment money?


As per SEBI regulations, every mutual fund has the obligation to disclose full portfolios of all of their schemes on a monthly basis on their website. Portfolio disclosure on a half-yearly basis is published in the newspapers. The fund house can also send the disclosure of half-yearly portfolios to their unitholders.

 

Out of the various types of mutual funds, which is the best one to invest in?

There is no size fits all approach to investment decisions. The investor should take into account the specific needs and the investment objectives before deciding. Information about various types of mutual funds is available online and in the offer document. It is advisable to read them carefully.

 

 
Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.
First Published on Dec 3, 2019 03:55 pm
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