If you are just starting out with mutual funds, it might be daunting for you. After all, your money is at stake. It is advised to gain some knowledge about mutual funds before making investments.
Mutual funds have been divided into different types. It becomes crucial to know about different types so that you can invest your money according to your financial goal, ability to invest, and risk tolerance. Check out different types of mutual funds and begin your innings as an investor in mutual funds.
There are three broad categories and all mutual fund types fall into these categories:
These funds invest your money in stocks or shares of companies. You can expect high returns and high risks in this category. Investing in equity funds for a long term is a wise idea.
Debt funds comprise of company debentures, fixed income assets, government bonds, and so on. You can expect moderate returns and low-risk profile. These are ideal for senior citizens who cannot afford to take risks at a critical age.
Money Market Funds
These are highly liquid instruments comprising of treasury bills, commercial papers, and so on. These investments are available for a short-term up to a year. Returns are low but immediately available.
Mutual Fund Types
- Liquid Funds – As the name suggests, these are highly liquid funds that invest your money for a maturity period of maximum 91 days. Don’t expect high returns in this segment.
- Fixed Maturity Plans – Similar to fixed deposits, these are close-ended mutual funds. You can expect higher returns than fixed deposits. After you invest your money, you can redeem amount on or before the maturity date.
- Short-term Funds – These are debt funds with a maturity period of one to three years. You can expect high returns if the interest rates are high.
- Ultra Short-term funds – The tenure of investments varies from a few months up to a year. These funds are suitable for parking surplus amount.
- Dynamic Bond Funds – These funds comprise of both debt securities and money market instruments. The maturity period is not fixed and the fund manager is responsible for the managing the portfolio
- Gilt Funds – These are solely invested in government securities. The interest rate fluctuations are considerably high. Invest for a longer duration to harness impressive returns.
- Income Funds – The amount is invested in corporate bonds, government bonds, and money market securities. The risk associated with these investments is fairly high. If you invest for a long time, you can reap high returns.
- Equity-oriented Hybrid Funds – The majority of the corpus, at least 65%, is invested in equities. The rest of the money is parked in debt funds. Thus, the volatility is reduced in case the equities doesn’t perform as per expectations.
- Large-cap funds – The money of the investor goes into buying shares of established companies with large market capitalization. The risk is relatively low and the rates are more than average. Since companies are already established, the chances of blunders are less.
- Diversified Funds – The corpus is invested into stocks of large-cap, small-cap, and mid-cap companies. The role of a fund manager is crucial in this segment.
- Small & Mid-cap Funds – As evident by the name, money is invested into stocks of small and mid-cap companies. The risk is very high and the returns can be equally rewarding as well.
- Equity-linked Saving Schemes – ELSS invests the majority of the corpus in stocks. Under this scheme, you can avail tax benefits for an investment of up to Rs 1.5 lakh per annum under Section 80C. The minimum lock-in period is three years.
- Sector Funds – These funds are the riskiest amongst all the funds. If you have immense knowledge pertaining to business sectors in the economy, you should go ahead with sector funds.