Mutual funds is a collective scheme of pooling money from different investors to buy securities and are managed by professionals.
Mutual fund market is evolving gradually in India and there are different types of mutual funds suiting one's risk tolerance level and investing goal.
Types of Mutual Funds based on maturity period
1. Open Ended Fund: In open ended funds investors can enter or exit anytime depending on convenience. The funds do not have any fixed maturity date and the important feature of the fund is liquidity.
2. Closed Ended Fund: These funds are open to investors for a specific period of time and have a definite maturity period. Close ended funds are listed on the stock exchange.
3. Interval Fund: These funds are a combination of both open ended and close ended funds. They may be listed on stock exchange. These funds allows the investors for sale or redemption at a predetermined rate.
Types of Open Ended Mutual funds based on Investment Goal
1. Equity or Growth Fund - Equity or Growth funds invest the majority part of the money in equity or stocks.
The investment objective of the fund is long term investment and capital appreciation. These funds are suitable for investors who are risk lovers and have high risk appetite.
Equity or Growth funds can be of:
* Index Scheme - These type of funds replicate the performances of the benchmarks indices such as Nifty, Sen sex etc.
The portfolio of these funds comprises of stocks that replicate the index and hence returns from the funds more or less match to those generated by the index.
* Sector-specific Scheme - The returns of the funds depend on the performance of the respective industries like Pharma, IT etc. These schemes only cater to industries specified in Scheme Information Document. These funds are risky funds as their returns are associated with performance of a particular industry and the returns are generally higher.
* Tax Saving - These funds offer investors tax benefits under specific provision of Income Tax Act. They invest in equity so attract risk and generate capital over medium or long term investments.
2. Debt or Income Fund - Debt or Income Fund invests in securities such as bonds, corporate debentures and government securities.
These funds are less risky than Equity/Growth funds. The investment objective of the fund is to provide stable income as well as capital protection. These funds are suitable for risk neutral investors.
3. Money Market or Liquid Fund - Money Market or Liquid funds are the funds which invest in safer short term money market instruments like Treasury bills, Certificate of Deposits (CDs) and Commercial Paper. The investment objective is liquidity, capital protection along with moderate income. These funds are suitable for risk averse investors and short term investors.
4. Balanced Fund - Balanced Fund are a kind of hybrid fund that invests both in equity and fixed income instruments.
But the major portion is invested in equities. The investment objective is to provide stability of returns as well as capital appreciation. These funds are suitable for risk averse investors.
5. Gilt Fund - Gilt funds only invest in government securities. They carry zero credit risk but are associated to interest rate risk. The objective of the fund is to provide capital protection. These funds are also suitable for risk averse investors.
Types of Close Ended Mutual funds based on Investment Goal
1. Capital Protection - These funds invest in high quality fixed income securities with a marginal exposure to equities. The investment objective is to provide capital protection and reasonable returns.
2. Fixed Maturity Plan (FMP) - These funds have fixed maturity period and invests maximum portion of the total corpus in debt instruments.
Before investing in mutual fund you must be clearly define your investment goal and know your risk tolerance level. Then you can start investing in mutual funds that suits your need best.