Types of Mutual Funds - A Basket to Choose from

Mutual Fund is a professionally managed investment scheme where a large number of investors pool their money collectively. These funds are mostly managed by Asset Management Company that invest the money of group of people in stocks, bonds and other market securities. The professional fund manager exercise his management skills to invest in the financial investment and provide benefits to the investor.

The Mutual Funds are closely monitored by the Securities and Exchange Board of India (SEBI) whose basic purpose is to protect the interests of the investors. The people investing in mutual fund buy the ‘units’ which represent the share of holdings in a particular scheme and hence the investor can also be called a ‘unit holder’. The units purchased can be redeemed as and when needed at the fund’s present Net Asset Value (NAV). As per the fund’s holdings the NAVs fluctuates and thus the investor has to bear the loss or gain of the fund according to his proportion.

The biggest boon of investing in Mutual Funds is that the unaware investors get the professional guidance and access to diversified portfolios of equities, bonds and other securities. Also, the availability of types of mutual funds provides the flexibility to choose as per one’s interest.

The funds are categorised on the basis of structure, asset class and speciality. The investor according to his/her objective can select which mutual fund will be the best. The description of various types of funds on the basis of different parameters is provided below:

A) On the basis of Structure

On the basis of structure MF are divided into 3 categories and they are as follows:

• Open-Ended Funds -  An open-ended fund or scheme is the one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
• Close-Ended Funds -  A close-ended fund exist for a fixed period of time. Investors can purchase units of close-ended funds from the mutual fund at the time of the New Fund Offer.  New Fund Offer means when a mutual fund launches a new scheme and invites investors to invest in the scheme. Once the NFO closes, investors can purchase and sell their units on the best mutual funds segment of the stock exchange at the prevailing market prices at which the units are trading. The investor can buy/sell the units through a stockbroker.

B) On the basis of asset class

Based on the asset class, the funds are categorised as equity funds, debt funds, money market funds and balanced or hybrid funds.

• Equity Funds - The money under these funds is invested in stocks. The aim of investing in these funds is to increase the money faster than the fixed income plans and involves higher risk.
• Debt Funds - These funds invest in debt instruments such as  company debentures, corporate bonds, government securities, commercial papers and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seeking regular and steady income. They are less risky when compared with equity funds.
• Money Market Funds - Money market comprises of risk-free and secured short term debt instruments that offer a lower return in comparison to other types of mutual funds. The money under these funds is generally invested in government treasury bills.
• Balanced or Hybrid Funds - As the name suggests, these funds invest in both the equity shares and debt instruments. They provide a balanced mixture of security, income and capital appreciation.

C) On the basis of Speciality

Certain funds focus on specialized mandates and invest in a particular sector. This category includes:

• Gilt Funds - In Gilt funds the investment is made in Central and State Government securities. It is best suited for the medium to long-term investors who have poor risk appetite. The Government securities don’t have default risk.
• Global Funds - These funds invest in the company located in any part of the world. Alike, international/foreign funds the investment under it can be made even in the investor’s own country.
• Real Estate Funds - The investment is made in the companies that work in the real estate sector.
• Sector Funds - The investment is made mostly in a particular sector. These funds are considered extremely risky because the funds are directed towards a single theme or sector.

The various types of mutual funds offers great variety to the customers to pick the one that caters the requirement and help reach the financial objective.

Disclaimer - Mutual Funds are subject to market risks. Please read the scheme related documents carefully before investing.