Different Types Of Mutual Fund Schemes

The Different Types Of Mutual Fund Schemes

Mutual funds are loved by many, as it is suitable for any type of investor and every type of goal. Be it to create wealth quickly or achieve your goals effortlessly, mutual funds are here to help you out. Here’s a detailed guide on what mutual funds are and what the different types of mutual fund schemes you can invest in are.

Mutual funds collect money from several investors and all the money is then invested in a mutual fund scheme. They are managed by highly skilled professionals called fund managers. The obvious question here is, how is this different from stock trading? Stock trading is when you buy individual stocks of other companies. But mutual funds club the stocks of a couple of companies to maximize returns and reduce risk.

For example, you want to buy stocks for ₹10,000. Firstly, stock trading requires hours of research and months of tracking the data of a particular stock. You do all your homework and buy the shares of ABC company. Let’s say, ABC company is an IT (Information Technology) firm and it provides its services to clients in Europe and the U.S. One share of ABC costs ₹2000, and you have bought 5 shares. The problem here is that your profits will solely depend on the performance of ABC. If the value of the shares falls, the stock, which was worth ₹10,000 earlier, might be worth ₹8,000 later.

So, how do you remedy this? You take your ₹10,000 and invest across the stocks of several companies, which belong to different industries. In this case, even if the value of one company’s share declines, the other company stocks will be performing well. So, the losses made by one stock will be adjusted by the profits made by the other stocks. This is what mutual funds do. They take your money and invest across various companies’ stocks, debt instruments, commercial papers, and so on. This helps you to earn returns even during stock market crashes.

Before we proceed further, we would like to let you know that we have a glossary of terms where you can find detailed definitions of the words used in the article. The name of the article is Mutual Funds Terminologies. Please head there if you need to know the meaning of any terminology.

A mutual fund scheme is classified based on the asset class, structure, investment goals/philosophy, specialty, and risks. An investor may pick any of these mutual funds based on their risk profile, investment objectives, and time horizon.

These funds invest in stock markets.

They invest in fixed income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments, etc., Woah, that’s a lot of jargon. Let us break it down.

Firstly, what is a bond? In simple terms, bonds are a loan. When you buy bonds, you are lending money to the entity that is issuing the bond (issuer). The entity could be the government, a company, or a bank. The issuer is generally obligated to pay interest at set intervals over the bond's life and then repay the principal amount when the bond matures.

Debt mutual funds buy these bonds and they are ideal for investors who want regular income but are risk-averse. They are less volatile, and hence, are less risky than equity mutual funds. If you are someone who is already putting money in traditional fixed income products like Bank Deposits, then you can consider investing in debt funds.

These funds invest in money market instruments such as treasury bills, certificates of deposit, commercial papers, or repurchase agreements (repo). These funds are advisable for individuals who have short-term cash requirements and would like to liquidate their investments as and when required.

They invest in more than one asset class i.e. equity, debt, and other asset classes depending on the investment objective of the scheme. There are different hybrid funds based on their asset allocation.

They include Aggressive Hybrid Fund, Conservative Hybrid Fund, Dynamic Asset Allocation Fund, Multi-Asset Allocation Fund, Arbitrage Fund, and Equity Savings Fund.

These funds allow investors to buy or redeem units at any time of the year, at the prevailing net asset value (NAV). The biggest advantage is that they are liquid and can be withdrawn at any time.

Close-ended mutual funds are those where the units can be bought only during the new fund offer (NFO) period and are traded at discounts or premiums. They can only be redeemed after the fund matures, which can be anywhere between three and seven years. Since they have a longer lock-in period, they are suited for investors looking at a longer investment horizon.

This mutual fund scheme allows investors to buy or sell units only during specific intervals of time. Although these funds can invest in equity or debt, you will find them largely investing in debt instruments.

These are fund schemes that invest in a specific sector such as infrastructure, IT or pharma. The returns are linked to the performance of the specific sector.

These funds are not managed by fund managers and are ideal for passive investors. The funds are invested in a financial index and are in line with the performance of the index.

It is an investment option sold and bought on exchanges and belongs to the index fund family.

These are funds that invest in various assets, including equity, debt or gold, commodities, or metals.

This is a mutual fund scheme that is also called a multi-manager mutual fund. It allows the investor to invest in different portfolios belonging to other funds.

SEBI recently announced new risk levels and introduced its own 'risk-o-meter' for mutual funds currently in operation. The original risk meter had each fund being rated based on five risk levels: High, Moderately High, Moderate, Low to Moderate, and Low. However, that meter was not a fund risk meter but a fund category risk meter.

With the new risk-o-meter, investors can now understand the actual risks associated with each fund's portfolio. It allows you to judge whether or not to invest in a fund. As your portfolio and the market conditions change, the meter's risk level also changes and allows you to decide whether or not to redeem a fund. Here is how risk-based mutual funds are classified.

Such a mutual fund scheme allows investors to grow their wealth and are typically equity funds. They invest in shares or growth sectors and are riskier with the possibility of higher returns than other funds.

Income funds invest in debt instruments and are ideal for investors who wish to have steady returns. The risk associated with such funds is at moderate or low levels.

These funds invest in short or very-short term securities to generate liquidity, making them an ideal short-term investment option. These funds come with a tenure of not more than 91 days.

Known widely as ELSS (equity-linked savings schemes), they help investors save tax under Section 80C of the Income Tax, 1961. Investors can claim a deduction of up to ₹1.5 lakh in a financial year after investing in them.

These funds are not directly invested in commodities but in companies working in such markets. Examples are companies that are into mining or commodity production.

These funds don't involve direct investment in the markets but invest in securities, ETFs or treasury bills to generate steady and regular growth.

As the name suggests, these are funds that have a long-term perspective and aim to provide steady returns after retirement.

Phew! There are many types of mutual funds in India and each of them help every type of investor achieve their goals. We hope this article will help you choose a mutual fund scheme for your needs. If you are looking for the perfect platform to start your mutual fund journey, look no further and head over to Koshex right away.

With Koshex, you get the right knowledge to make informed financial decisions. Check our other blogs related to mutual funds to know more about selecting the right mutual fund scheme for you. You can also check our calculators to learn how much wealth you will be accumulating if you invested through various investment instruments.

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