There are various types of mutual funds, here we are classifying various types, according to maturity period and investment objective. To access your need for a certain type of mutual funds, it is advisable that you contact an expert mutual fund advisor.
Based on maturity period:
- Open-ended Fund
- Close-ended Fund
- Interval Funds
An open-ended fund is a fund that is available for subscription and can be redeemed on a continuous basis. It is available for subscription throughout the year and investors can buy and sell units at prevailing NAV. These funds do not have a fixed maturity date. This is ideal for investors who want to maintain a liquid portfolio. Open Ended Funds are most popular in India.
A close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years. These funds are open for subscription for a specified period at the time of initial launch. To provide liquidity these funds are listed on a recognized stock exchange. However, these funds are not very popular in India.
Interval funds combine the features of open-ended and close-ended funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals on the prevailing NAV. These funds don't find favour among Indian investors.
Based on investment objectives:
- Equity/Growth Funds
- Debt/Income Funds
- Balanced Funds
- Money Market/ Liquid Funds
- Gilt Funds
Equity/Growth funds invest a major part of its corpus in stocks and the investment objective of these funds is long-term capital growth. Equity funds invest minimum 65% of its corpus in equity and equity-related securities. This is to provide tax-free returns ( As per Indian Law Equity Investment or Equity Mutual Fund investments over 365 days are tax-free). These funds may invest in a wide range of industries or focus on one or more industry sectors. These types of funds are most suitable for investors with a longer time horizon and higher risk appetite.
Debt/ Income funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds invest minimum 65% of its corpus in fixed income securities. By investing in debt instruments, these funds provide low risk and stable income to investors with preservation of capital. These funds tend to be less volatile than equity funds and produce regular income. These funds are ideal for investors whose main objective is a safety of capital with moderate growth. However the returns from these Funds as taxable.
Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These funds provide both stability of returns and capital appreciation to investors. Balanced Funds are ideal for investors looking for a combination of income and moderate growth. They generally have an investment pattern of investing around 60% in Equity and 40% in Debt instruments. It is important to note that if a fund has less then 65% Equity then they do not qualify for tax-free returns.
Money market/ Liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for a period of fewer than 91 days. The aim of Money Market /Liquid Funds is to provide easy liquidity, preservation of capital and moderate income. These funds are ideal for corporate and individual investors looking for moderate returns on their surplus funds for a short period of time.
Gilt funds invest exclusively in government securities. Although these funds carry no credit risk, they are associated with interest rate risk. These funds are safer as they invest in government securities.
Some of the common types of mutual funds and what they typically invest in:
|Type of Fund||Typical Investment|
|Equity or Growth Fund||Equities like stocks|
|Fixed Income Fund||Fixed income securities like government and corporate bonds|
|Money Market Fund||Short-term fixed income securities like treasury bills|
|Balanced Fund||A mix of equities and fixed income securities|
|Sector-specific Fund||Sectors like IT, Pharma, Auto etc.|
|Index Fund||Equities or Fixed income securities are chosen to replicate a specific Index, for example, S&P CNX Nifty|
|Fund of funds||Other mutual funds|
It is advisable that you also go through the list of top mutual funds in India.
- Tax-Saving (Equity Linked Savings Schemes) Funds
- Index Funds
- Sector-specific Funds
Tax-saving schemes offer tax rebates to investors under specific provisions of the Income Tax Act, 1961. These are growth-oriented schemes and invest primarily in equities. Like an equity scheme, they largely suit investors having a higher risk appetite, want to save tax under Sec 80 CC and aim to generate capital appreciation over a long term. They come under EEE (Exempt, Exempt, Exempt ) category. The investments under these schemes qualify for tax exemption under section 80CC of the Income Tax act, besides all gains are also tax-free at the time of redemption, that is after a minimum period of 3 years.
Index schemes replicate the performance of a particular index such as the BSE Sensex or the S&P CNX Nifty. The portfolio of these schemes consists of only those stocks that represent the index and the weight-age assigned to each stock is aligned to the stock's weight-age in the index. Hence, the returns from these funds are more or less similar to those generated by the Index.
Sector-specific funds invest in the securities of only those sectors or industries as specified in the Scheme Information Document. The returns on these funds are dependent on the performance of the respective sector/industries, for example, FMCG, Pharma, IT, etc. The funds enable investors to diversify holdings among many companies within an industry. Sector funds are riskier as their performance is dependent on particular sectors although this also results in higher returns generated by these funds.