A Mutual Fund is a pool of money managed by a professional investment manager to achieve the common investment objectives of investors. Before investing, it is advisable to assess and analyze your individual investment goals so that you can invest in an appropriate scheme. There are thousands of schemes available in the market claiming good returns and narrowing down to the few that would suit your financial goals can be an uphill task. While mutual funds can be categorized in different ways, here is a lowdown on the different types of mutual funds available.
Every mutual fund scheme has an investment objective which defines the asset class in which it would invest the funds and the structure it would follow. It also has a specialization element at times and the risk the scheme is willing to take to meet its objectives.
For e.g. there might be a scheme with an investment objective of providing capital appreciation over a long term. Usually such schemes would invest in equities and be open-ended to allow people to earn good returns while offering the flexibility of exiting whenever they want.
Types of Mutual Funds based on Investment Objective
- Growth funds - These are for investors who are looking for capital appreciation and don’t mind taking risks. These funds are recommended as a long term option. These funds predominantly invest in equities.
- Income funds -These are designed for investors looking for regular income from their investments and are unwilling to take a risks. Such schemes usually invest in debentures, bonds and other fixed income options.
- Liquid funds - These are meant for investors with short term investment windows and low risk appetites. Such schemes typically invest in treasury bills, commercial papers, etc.
- Tax-Saving Funds (ELSS) - These schemes have been approved by the Government of India for deductions under the Income Tax Act. Such schemes invest in equities, have high risk and offer promising returns.
- Capital Protection Funds - As the name suggests, these funds are designed to ensure maximum protection of the invested capital. Such schemes usually divide their corpus between equity and debt in a calculated manner to ensure protection of capital.
- Fixed Maturity Funds - Similar to fixed deposits, these are close ended funds and offer an indicative yield. Such funds invest in money market and debt instruments. The funds are invested ensuring that the maturity date of the investment coincides with the maturity date of the fund.
- Pension Funds - These are meant for investors with an investment objective of regular income post retirement. Such funds invest in equities and debt to provide steady returns without risking the capital too much.
Types of Mutual Fund based on specialization
| Type of fund | Specialization |
|---|
| Sector Scheme | Focused on a particular sector as defined in the investment objective of the fund |
| Index Scheme | Mirrors the movement of a certain index like BHARAT 22 ETF TRI, S&P BSE 500 TRI, etc |
| Emerging market fund | Investments made in developing companies/countries |
| International Scheme | Invested internationally |
| Fund of funds | Invests in other mutual funds Schemes |
| Contra Fund | These schemes invest in instruments that are not preferred by investors due to short-term concerns but has the potential to offer a high reward-risk ratio. |
| Gilt Scheme | Invests in government securities |
| Exchange traded fund | An investment fund traded on the stock exchange |
Apart from these you can have open-ended, close-ended and interval funds based on when an investor can purchase and/or redeem units in the scheme. Schemes are also classified according to the risk element attached to them. There are 5 risk classes:
a. Low risk
b. Moderately low risk
c. Moderate risk
d. Moderately high risk
e. High risk
