Different Types of Mutual Funds in India

Posted By: Vaishali Parnami
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Are You Planning To Invest In Mutual Funds But Don't Know What Type To Invest In?

Indian mutual fund schemes are constantly evolving, however, still, most of the people don't prefer investing in mutual funds. Everyone fears for failed investments and risk factor involved in mutual funds. This fear is because we don't have enough knowledge about the mutual funds.

Mutual funds are highly flexible, and if you invest intelligently, they have high returns. You just have to choose the right scheme considering all the factors such as investment amount, the risk involved, investment period, etc.

Different Types of Mutual Funds in India

Here are some of the mutual fund schemes you should know about:

Based on Fund Scheme

Close-Ended- In this scheme, funds can be bought only during initial launch period and the maturity date is also specified. Once close-ended funds are bought, you cannot sell it back, you can only re-sell it in the stock market at the share prices of that particular time.

Open-Ended- You can buy and redeem funds in open-ended scheme throughout the year. You can invest as much as you want and keep funds as long as you want. However, open-ended funds have an extra fee due to its active management. These type of schemes are best for people who want to invest in liquidity and need the ability to withdraw earnings at any time.

Based on Asset Class

• Debt- Debentures, government securities, bonds, and other funds like these come under debt funds. These are safe to invest in as they have a fixed return. However, since the return is fixed these investments are low-return investments. Additionally, no tax is deducted at the source, so the investor has to pay tax on the earning.

Equity- Debt funds are low risk and equity funds are high risk. However, equity funds generally provide a high return on investment. These are investments in company shares and stocks and have less tax liability when compared to debt funds.

Hybrid- These are often called as balanced funds because of the fact that hybrid funds are a mixture of equity and debt funds. They are riskier than debt funds but less risky than equity funds. The return on investment also lies in between debt and equity funds. For instance, if you invest in a balanced fund, 65% - 80% part of the return is in equities and the remaining is in debt.
Based On Investment Objective

Fixed-Income- The fixed income funds are again low-risk funds and offer a fixed return for a time period, and that is also the reason why fixed-income funds come under debt funds. Just as debt funds, there is a low possibility of a large profit but the dividends of fixed-income funds are usually higher than growth fund dividends.

Growth-Income- The growth income funds are like equity investments that offer capital returns which also makes it a high-risk scheme. The dividends under this scheme are lower than fixed income scheme.

Balanced- Just as the name explains, balanced funds are a mixture of growth and fixed income funds which means investment in both debt and equity. However, balanced funds maintain a balance in return and risk by offering lower risk than growth or equity and high risk than fixed income or debt schemes.

Special Funds

• Tax-Saving Schemes- Many people have now started investing in tax-saving schemes like equity-linked saving schemes. These schemes offer tax rebate and help you reduce your overall taxable income. However, here, the catch is that there is a Rs 1 lakh limit for the tax rebate, and the invested amounted is locked in for 3 years. The person investing can't transfer, redeem, or sell the invested funds.

Gilt Schemes- These are government funds which are free from credit risk and frees the investor of any tension related to risk on investments.

Real Estate Schemes- Most people are of the opinion that real estate schemes are restricted to buying shares of a realty company, when, in reality, these funds include investing in property, investing in a real estate project, or purchasing shares of a housing company. The risk factor of this scheme is dependent on the company and where they are investing.

Interval Schemes- Interval schemes are a mixture of close-ended and open-ended schemes. These funds can be sold, redeemed, or subjected to stock exchange trade.

Sector Schemes- This scheme is a form of equity investment only but the difference is that the sector schemes are limited to a particular sector. Obviously, sector schemes are riskier as they depend on the sector's performance. Hence, these funds are mostly suggested to people who have extensive knowledge about investing.

Index Schemes- Index schemes are a type of equity funds only but these work as a benchmark for the market performance. Sometimes, indices are made for evaluating the performance of a specific sector. Each index has some stock participants, and the index value is directly related to the stock value. However, it is not possible to invest directly in the index, and investors invest in an index fund. For example, if the stock value is 15% in the index, the scheme or fund will invest the same percent (i.e.15) in the stock. This leads to the recreation of the index for generating profit for investors.

Money Market Schemes- Money market investments include treasury bills (T-bills), certificate of deposits(CD), commercial paper (CP), etc. These are liquid instruments and considered safe for moderate but immediate returns. Money market schemes are considered most stable of all schemes because its maturities are short-term.

Select the Right Scheme

Selecting the right scheme depends on your requirements and investment return expectations. However, this is not a simple task. One advice that we can give you is to invest in more secure schemes like money market schemes and debt funds if you are just starting to invest. Once you start understanding the market, you can move to other schemes with high returns.

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