Did you know? Mutual Funds are one of the most common investment vehicles for participating in the stock market.
Today they are among the most popular investment opportunities for beginning investors and experienced investors alike. Mutual funds are sponsored by Asset Management Companies (AMCs) that pool contributions from both individual and institutional clients with similar goals.
If you are looking to diversify your money, there are many mutual fund options to consider! The different mutual fund offerings can be grouped in a number of ways, based on investment objectives, investment structure, asset class, or focus of investment.
At Moneyplantfx, we believe that understanding the types of mutual funds available will help investors make more informed decisions about how to succeed in the market and align their portfolio with their financial objectives.
Types of Mutual Funds
Mutual funds can generally be categorized into four types:
We will then elaborate on each category and discuss fifteen different types of mutual funds.
According to investment Objective
Mutual funds based on purpose are created to assist an investor in investing the fund in accordance with their own financial objectives.
1. Growth mutual funds
- Objective – Invest in stocks of companies with a high growth profile to develop wealth over the long-term.
- Characteristics – Equity-focused (small-cap and mid-cap, volatile, 5+ years investment are best.).
- Best for – Investors willing to take risk for higher long-term returns.
2. Income mutual funds
- Objective – Play regular income through the use of debt instruments, such as bonds or government secured instruments.
- Characteristics – Generally lower risk than equity mutual funds, steady income, protection of capital.
- Best for – Retirees or conservative investors seeking stability.
3. Balanced (Hybrid) Mutual Funds
- Objective – Combination of capital appreciation and income generation through investments in both stocks and bonds.
- Characteristics – Diversifying their investment holdings, moderate risk, provide steady capital growth and income generation.
- Best for – Clients who are looking for a balance into their investment portfolio.
4. Tax-Saving Mutual Funds
- Objective – Provide tax benefits under Section 80C, while primarily investing in stock equities.
- Characteristics – 3 year lock-in period, long term investment horizon, primarily invested in stock equities to generate long term wealth creation.
- Best for – Clients who want both tax savings from their investment, while also wanting equity/growth in their investment.
5. Aggressive Growth Funds
- Objective – Maximize capital appreciation, through high growth stocks.
- Characteristics – A high level of volatility, taking sector-specific bets, longer term investment horizon.
- Best for – High risk clients, looking for some significant capital appreciation over the longer term.
According to Asset Class
These funds invest money within equity, debt, or short-term money market instruments.
6. Equity Funds
- Objective – For the purpose of long-term wealth creation via investment in stocks of companies.
- Characteristics – High risk, with the potential for high returns; diversified across market capitalization and sectors.
- Best for – Long-term investors with a higher risk tolerance.
7. Debt Funds
- Objective – To generate stable income through investment in fixed-income instruments.
- Characteristics – Less risk than equities, a predictable income stream, and include categories such as gilt, income and liquid funds.
- Best for – Investors who are low risk and want to find alternatives to fixed deposits.
8. Money Market Funds
- Objective – To preserve capital, while providing liquidity overnight if needed.
- Characteristics – Invests in low-risk, short-term securities, such as treasury bills.
- Best for – Investors with short-term goals or surplus investment funds that are not needed for an emergency.
9. Hybrid Funds
- Objective – A balance of income and growth through the use of a combination of equity and debt securities.
- Characteristics – Diversification across the portfolio, moderate level of risk, and fluid allocation of equity-the debt.
- Best for – Medium-term investors looking for income that can grow over time.
According to Investment Structure
The structure indicates how an investor is enabled to purchase or sell units.
10. Open-End Fund
- Characteristics – No maturity, flexible in/out, units bought and sold at NAV.
- Best for – Investors wanting liquidity and flexibility.
11. Closed-End Fund
- Characteristics – Fixed maturity, trading on stock exchange, the price could differ from NAV.
- Best for – Investors with timeframes or investors interested in your sector.
12. Interval fund
- Characteristics – Hybrid of open and closed-end, share redemption at fixed intervals.
- Best for – For at least periodic liquidity.
According to Investment Focus
These funds also have a narrower investment focus, emphasizing specific sectors, indices, or investment strategies.
13. Sector funds
- Objective – Concentrate on a particular sector, such as IT, healthcare, energy etc.
- Characteristics – Sector-specific risk can be very high, but potentially high returns.
- Best for – If you have conviction that the sector you are investing in is likely to grow.
14. Index funds
- Objective – Replicate the investment performance of an index, e.g. , Nifty 50
- Characteristics – Passively managed, lower cost, can be broadly invested across a market.
- Best for – For investors, focused on long-term, indexed, passive investment.
15. Exchange-Traded Funds
- Objective – Tradeable funds that track the performance of indices, commodities or sectors.
- Characteristics – Liquidity in the intraday market, tax efficiency and low expense ratios.
- Best for – Potentially an ideal investment option for sophisticated investors looking for trading styles.
Conclusion
The mutual fund industry has options available for all types of investors, whether your objectives are growth, income, preserving capital, investing with tax savings, or investing in a certain sector.
- Equity funds provide the possibility of growth over the long term.
- Debt funds provide safety and return.
- Balanced/hybrid funds provide both safety and return.
- Finally, tax-saving funds (ELSS) allow an investor to deduct taxes as well.
At Moneyplantfx, we believe when investors understand the different categories, they feel more empowered to allocate towards mutual funds that align with their preferences. When implementing a quality diversified structured portfolio, they are able to grow their wealth and also preserve their wealth with respect to market uncertainty.
Read more-https://moneyplantfx.com/the-benefits-of-mutual-funds/
