“Mutual funds”, a term often heard to us in the new era of investment. But have you ever wondered what mutual funds actually are? How many types of mutual funds are there in India? What are the various types of mutual fund scheme available in India? Well, if you don’t, here is the answer to all your questions.
Mutual fund is a mechanism of collecting money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
You can invest in many different types of mutual fund with the help of some FEE ONLY SEBI registered advisors. They help you analyse how much you should invest in different types of mutual fund, namely a particular stock, gold, bonds or any other type of asset.
Apart from profits, different types of mutual fund do have risks as the money invested may even bear loss. You must have often heard a line in ads stating, “Mutual funds are subject to market risk, read all scheme related documents carefully.”
Types of Mutual Funds in India: My list of 8 Mutual funds
Now what are the different types of mutual fund schemes? How do they work? Let’s dive into the answers to these questions. A scheme refers to a system of organising your funds to maximise the profits. Let’s have a look at different types of mutual fund scheme in India based on maturity period, and investment type.
Types of Mutual Funds (on the basis of Maturity Period)
On the basis of maturity period, we can differentiate Mutual funds in India as Open Ended funds and Close Ended funds.
Open-ended Fund/ Scheme
These types of mutual fund follow the policy of “anytime entry anytime exit” which means, a person or investor willing to invest in these kinds of funds can enter the market anytime and also withdraw or transfer their funds to in hand money whenever they want. Here in financial terms if we say, these funds provide easy liquidity to its investors. Also there is no fixed maturity period or lock in period in this type of mutual funds. There is no exit load as well. Open ended funds let investors have their free will over their investments. The name in itself explains the funds, as the funds are not having any fixed ending period hence they are called open ended funds. Some top open-ended mutual funds available in India are value fund, contra fund, thematic fund etc.
Close-ended Fund/ Scheme
Close Ended funds (CEFs) are just the opposite of open ended funds. These types of funds do have a maturity period. Entry and exit on these funds are bounded. The liquidity in these funds is not so ideal. Although even having a fixed maturity period, these types of mutual fund do have loopholes for money exchange.
You can only enter these funds whenever there is a launch of any New Fund Offer i.e. there is a launch of any new mutual fund scheme. An investor cannot exit these funds till they reach their maturity period. The only way they can get their investment in monetary terms is by selling their investment in the stock exchange.
The clause only stands valid when you get a buyer for your funds at the desired rates. The maturity period of these funds generally tends to be 3-5 years long. The person looking for a long term investment scheme only is often advised to invest in these funds. The reason for this is that liquidity through the exchange of stocks is often not recommended.
Some of the best close ended mutual funds in India are ICI Prudential Growth Series, SBI Tax Advantage Fund, etc.
Types of Mutual Funds in India (Basis of Investment Objective)
On the basis of investment objective, there are 6 major types of mutual funds . Let’s look at them:
Growth/ Equity Scheme
Growth oriented scheme is the type of mutual fund that focuses majorly on to make the maximum/optimum returns on their investment. It is also known as Equity oriented scheme because it focuses on buying and selling of shares of a company. But with the probability of greater returns comes high risk as well.
The risks in these types of schemes are higher compared to others. People opting for these kinds of funds must have the capacity to absorb the loss in case any. Young people who are willing to take big risks in hopes of higher profit, people having surplus capital to invest in order to get higher returns etc. can invest in these funds.
Income/ Debt Oriented Scheme
Income oriented funds basically look for a regular income. These funds can be invested in various types of assets but the most reliable asset for them are cash funds. An investor investing in a cash fund can expect regular interest on their money. Liquidity in these types of funds are also great.
The other different assets on these types of funds can be bonds or equity. They also offer a regular income in the form of coupons etc. The risk in these types of funds is comparatively lower than the growth funds. People looking for decent returns with a regular income and low risk factor can invest these funds for their time period ranging from as short as three months to a year or as long as 3 years to 5 years.
Balanced funds typically are a proportionate balance of both growth funds and income funds. They tend to invest 65-80% in their equity funds and 20-35% in debt funds.
Major proposition of returns on these types of funds in India also comes from the investment in the growth fund, the proportion invested in debt funds provides a source of steady income and safety to the funds as in case the equity funds face any loss, returns from the debt funds tries to minimise or absorb the loss.
Money Market or Liquid Fund
These are the funds that do not invest in equity of any company, rather they invest in assets ensuring fixed incomes such as bonds, government securities etc. It is a short period mutual fund that ranges not more than 91 days, but this does not mean you cannot invest for a longer period than this.
You can keep your money invested in these kinds of funds for as long as you can. Once the fund matures you can take your money and invest in some other type of liquid fund scheme that’s how your money stays invested for as long as you wish. Risk prediction in these funds are easier but the still funds are not completely risk free.
Gilt funds are the funds that invest in government securities and bonds. The key features of these funds are that they involve no risk and assured credits. The reason for them to be absolutely risk free is the assurity that the money invested into the government will remain safe.
These funds have high liquidity as the buyer and seller for these types of funds are always available in the Indian stock market. The only risk these funds have is the interest rate risk i.e. the demand of these funds may decrease in the long term as new and better bonds may keep coming in the market.
Index fund is a type of mutual fund scheme in India, which is formed on the basis of market indices. There are various stock market indexes in India such as NIFTY-50, NIFTY-100, BSE Sensex etc. Investment in these funds have seen a huge growth in recent years after Warren Buffet appreciated the investments made in index funds.
These funds are preferred for people who want to get more market exposure and also want to have a diversity on their investment portfolio. People willing to invest in equity funds without taking much risk can also invest in these as the returns in these funds are predictable.
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Warning: Risk Involved in Investing in Mutual Funds in India
Mutual funds come with great returns and are one of the most preferred forms of investment in India. Apart from these mutual funds have other benefits too, such as liquidity, diversification, expert management, flexibility to invest in smaller amounts, accessibility, safety, transparency, schemes for financial goals, lower cost, tax saving, etc.
These were some of the most well known benefits of mutual funds. But with greater returns comes high risk as well.
Mutual funds is a sensitive mechanism. A person paying inadequate attention to it may have to suffer greater loss in future. The loss in mutual funds might have more than meaning, they include high expense ratio and sales charges, management abuses, tax inefficiency, poor trade execution.
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In a nutshell, we can say that mutual funds have both perks and risk. It is on an investor how he/she manages or chooses to manage their investment. The better planned are the investment, the lesser are the chances of risk and loss with higher returns. Mutual funds are not just limited to higher returns, they offer regular income a better and greater exposure to the market. Different types of funds offer different features. A person investing in mutual funds must stay updated about the economical relation of market trends and mutual funds and should invest in the right stocks, funds, bonds, etc. at the right time.
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What does liquidity in mutual funds mean?
Liquidity means the ease with which we can transfer or convert our funds into money.
What is the Taxation process for different mutual funds in India?
Ans :- If the funds are invested for a shorter period (less than 3 years) of time the taxes are as high as 30% but if the investor invests for a longer period (more than 3 years), the tax rate comes down approximately to 20%.
What is the difference between gilt funds and liquid funds?
Ans :- Gilt funds invest in government securities generally for a long time period on the other hand investment made in liquid funds are on debt assets with a maturity period of not more than 91 days.
What did we learn?
- 1 Types of Mutual Funds in India: My list of 8 Mutual funds
- 1.1 Types of Mutual Funds (on the basis of Maturity Period)
- 1.2 Types of Mutual Funds in India (Basis of Investment Objective)
- 2 Warning: Risk Involved in Investing in Mutual Funds in India
- 3 Conclusion
- 4 FAQs