Understanding the Different Types of Mutual Funds
Once a minor player in the financial market, mutual funds have now become a significant force, influencing the valuation of tradable assets such as stocks and bonds.
As an investor in mutual funds, you hold units that represent your share of the fund, based on your investment amount. The growth in the value of these investments, after deducting any applicable expenses, is then proportionally distributed to the investors or unit holders.
Investing in mutual funds comes with its own set of pros and cons when compared to direct investing in individual securities.
In today’s world, mutual funds play a crucial role in personal finance, especially in planning for retirement.
Let’s get into understanding the various types of mutual funds available in India.
Exploring the Various Types of Mutual Funds in India
The mutual fund industry in India is on a continuous growth trajectory. Numerous industry bodies are investing in educating investors about mutual funds. However, a report by Boston Analytics suggests that less than 10% of Indian households consider mutual funds as a viable investment option.
A closer look at the types of mutual funds reveals that they are perhaps one of the most flexible, comprehensive, and hassle-free investment avenues, capable of catering to a wide range of investment needs.
There are various categories of mutual funds, each designed to allow investors to choose a scheme based on their risk tolerance, the amount they wish to invest, their financial goals, and the investment term. This flexibility makes mutual funds a popular choice among a broad spectrum of investors.
Understanding Mutual Fund Schemes Based on Maturity Period
Mutual funds can be categorized into three types based on their maturity period – Open Ended Funds, Close Ended Funds, and Interval Funds.
1. Open Ended Funds:
These are the most flexible type of mutual funds. You can buy or sell these funds at any time, and they don’t have a set end date. The main advantage of these funds is their liquidity – you can easily buy or sell units at prices related to their net asset value (NAV). In fact, about 59% of all mutual funds are open-ended.
2. Close Ended Funds:
These funds have a fixed maturity period. You can only invest in them during the initial launch period, also known as the New Fund Offer (NFO). After the offer closes, you can’t make any new investments. The market price of these funds can vary from the NAV due to factors like demand and supply, investor expectations, and other market conditions. Some of these funds also allow you to sell your units directly to the mutual fund at NAV related prices from time to time.
3. Interval Funds:
These funds are a mix of open and closed ended funds. They allow investors to trade units at specific intervals. These units can be traded on the stock exchange or may be open for sale or redemption during certain periods at NAV related prices.
When choosing a mutual fund scheme to invest in, it’s important to get personalized advice. Look for a scheme that offers the right balance of growth, stability, and income, and aligns with your risk tolerance.
Understanding Mutual Fund Schemes Based on Principal Investments
Mutual funds can be grouped into different types based on what they invest in. These are some of the main categories:
1. Equity Schemes
These funds invest in stocks. The Securities and Exchange Board of India (SEBI) has defined 11 different types of Equity Schemes. However, a mutual fund company can only offer 10 of these, and they have to choose between Value or Contra. Even though 10 categories might seem like a lot, it’s reasonable given the different investment strategies that can be used. SEBI has also provided definitions for Large Cap, Mid Cap, and Small Cap to make things clearer.
2. Debt Schemes:
These are mutual funds that invest mainly in debt instruments like bonds, treasury bills, etc. The aim of these funds is to provide steady income over time. They are generally considered safer than equity schemes and are suitable for investors with a low risk appetite. However, the returns may not be as high as those from equity schemes. These funds can be a good choice if you’re looking for regular income and stability. Remember, it’s always important to consider your financial goals and risk tolerance before investing.
3. Hybrid Schemes:
These are mutual funds that invest in a mix of both equity and debt. The goal of these funds is to balance the risk and return. They aim to provide growth through equity investments and stability through debt investments. These funds are suitable for investors who want to enjoy the benefits of both equity and debt investments in a single fund. However, the proportion of equity and debt can vary from fund to fund, so it’s important to choose a fund that aligns with your investment goals and risk tolerance. Remember, investing in mutual funds should always be based on your financial goals, risk appetite, and investment horizon.
4. Solution Oriented Schemes:
These are mutual funds that are designed with a specific goal in mind. They are tailored for specific investment solutions like retirement or education. These funds have a mandatory lock-in period that aligns with the goal’s time horizon. For example, a retirement solution oriented scheme will have a lock-in period till retirement age. These funds are suitable for investors who have a specific financial goal and want a fund that is aligned with achieving that goal. As always, it’s important to choose a fund that matches your financial goals, risk tolerance, and investment horizon.
5. Other Schemes:
These are mutual funds that don’t fit into the categories of Equity, Debt, Hybrid, or Solution Oriented Schemes. They may include funds that invest in specific sectors, commodities, real estate, or other alternative investments. The investment strategy and risk-return profile of these funds can vary widely. Therefore, it’s important to thoroughly understand the fund’s investment objective and strategy before investing. As always, your investment decisions should align with your financial goals, risk tolerance, and investment horizon. Remember, diversification is key in investment. It’s always a good idea to have a mix of different types of schemes in your portfolio.
Best Tips to Invest in Mutual Funds
1. Know Your Goals:
Before diving into the world of mutual funds, take some time to think about your financial goals. Are you saving for retirement, a new home, or your child’s education? Understanding your goals will help you choose the right mutual funds to invest in.
2. Understand Your Risk Tolerance:
Mutual funds come with varying levels of risk. Some funds may offer high returns but come with higher risk, while others are more conservative with potentially lower returns. It’s essential to assess your own risk tolerance and choose funds that align with your comfort level.
3. Diversify Your Investments:
“Don’t put all your eggs in one basket” is a common saying in investing, and it holds true for mutual funds as well. Diversifying your investments across different types of funds can help reduce risk and protect your portfolio from market volatility.
4. Do Your Research:
Don’t just pick a mutual fund based on its name or past performance. Take the time to research each fund’s investment strategy, the track record of the fund manager, and its past performance in various market conditions. This will help you make more informed investment decisions.
5. Invest Regularly:
Consider setting up a Systematic Investment Plan (SIP) where you invest a fixed amount regularly, regardless of the fund’s Net Asset Value (NAV). Investing regularly can help average out the cost of investment and reduce the impact of market fluctuations on your portfolio.
6. Monitor Your Investments:
Once you’ve invested in mutual funds, don’t forget about them! Regularly review your investments to ensure they are still aligned with your goals and risk tolerance. You may need to make adjustments to your portfolio over time as your financial situation and goals change.
Bonus Tip: Consult a Financial Advisor:
If you’re feeling overwhelmed or unsure about which mutual funds to invest in, don’t hesitate to seek guidance from a financial advisor. A professional advisor can help you create a personalized investment plan tailored to your unique financial situation and goals.
Conclusion
In conclusion, investing in mutual funds can be a smart way to grow your wealth over time, but it’s important to approach it with the right knowledge and strategy. By understanding your goals, assessing your risk tolerance, diversifying your investments, doing thorough research, investing regularly, and monitoring your investments, you can set yourself up for success as a mutual fund investor.
Disclaimer: This is for educational purposes only. Please do your own research before investments in market.
