Mutual funds can be an effective investment tool to help grow money over a long-term horizon. As a new investor looking to invest in mutual funds, you may be faced with a dilemma on how to make the right choice, given the variety and types of mutual funds in the market.
The article discusses different mutual fund categories that can help you pick one based on your risk tolerance and investment horizon.
Broad classification
Mutual funds are broadly classified into three types – equity funds, debt funds and hybrid funds.
- Equity funds
These funds invest at least 65% of their assets in equities and equity-related instruments. They are best suited for aggressive risk-takers.
- Debt funds
These funds invest in fixed-income instruments such as debt securities, corporate bonds and government securities. They are suitable for investors with low to moderate risk appetite.
- Hybrid funds
Typically, these funds invest in a combination of equity and debt funds in 40:60 ratio. They are known to offer both income and growth options.
Based on structure
- Open-ended funds
These funds are open for repurchase and subscription continuously. Besides, they do not have a fixed maturity date and investors are free to buy and sell units at Net Asset Value.
- Close-ended funds
These funds offer limited units for purchase during the New Fund Offer period. You can redeem the units only after maturity, which is typically between three to seven years.
- Interval funds
These funds comprise open-ended and close-ended funds. But you can purchase them during set-periods alone.
Based on investment strategy
- Growth funds
These funds invest in stocks of emerging companies for maximum capital appreciation. They are considered a good option for those with a high-risk appetite.
- Income funds
These funds are well-suited for those looking for steady returns. They invest in fixed-income securities such as certificates of deposits and bonds.
- Liquid funds
These funds invest in money-market instruments and debt instruments for a short period up to 91 days. You can only invest up to Rs.10 lakh in liquid funds.
- Tax-saving funds
ELSS is a popular tax-saving mutual fund scheme that offers tax benefits under Section 80C up to Rs.1.5 lakh. It has the lowest mandatory lock-in period of three years.
- Aggressive growth funds
These funds are highly sensitive to market fluctuations but can help you earn good returns in exchange for the risk. Use a beta tool to help gauge the fund’s movements.
- Capital protection funds
These funds give your capital full protection but offer small returns. They mainly invest in deposit certificates, bonds and equity balance.
- Fixed maturity funds
As the name suggests, these bonds have a fixed maturity ranging from one month to five years.
- Pension funds
These funds allow you to build a retirement corpus by investing in a variety of assets such as debt securities and government securities.
Conclusion
Before you invest in mutual funds online, you may want to know about its different types to build a balanced portfolio. This can help you maximise mutual fund benefits and profit from them over a period.