Mutual Funds have gained significant traction over the past decade. If you are considering investing in a mutual fund, it is essential that you understand the basics of mutual funds and understand the types of funds and their features so that you can make the right decision.
In this blog, we seek to discuss the different types of mutual funds in India.
The following are the classification of mutual funds based on the different segments.
Based on the asset class, mutual funds are classified as –
Equity funds, as the name suggests, invest in equities and equity-based instruments. The money is invested in a basket of shares that may belong to different sectors, different market capitalization, and the likes. Equity funds are likely to provide the highest returns over the long-term and but come with a high degree of risk. Check out the best equity funds to invest in the Tarrakki app.
Debt funds invest in fixed income securities such as corporate bonds, government bonds, treasury bills, commercial papers, and the likes. Depending on the duration of maturity of instruments, the funds are classified as Fixed Maturity Plans (FMPs), Gilt Fund, Short Term Plans, Long Term Bonds, etc.
A debt fund should be opted for if you are looking for a safer investment. The returns level in such funds is lower when compared to the equity counterpart, and the same time it comes with lower risk.
Money Market Funds
The money market is also known as the cash market. The government, banks, or companies are the primary stakeholders who run the show in this market. These bodies raise funds for their operations by issuing instruments of very short term duration (typically less than three months). These instruments come with a high credit rating and are highly safe instruments for investments. Money market funds are used for more cash management or liquidity management purpose. These funds are an excellent alternative to a savings account as they offer returns in the range of 6-7% and are highly safe and comes with liquidity similar to that of savings account that offers merely 4%.
Hybrid funds are the mix of both equity and debt. These funds tend to provide the best of both worlds. Based on the combination of equity and debt, these funds are of two types – Aggressive Hybrid Fund or the Monthly Income Plan.
In the former, the equity to debt ratio is 60:40, whereas, in the latter, the ratio is just the opposite at 40:60. Owing to higher equity presence in the aggressive type, the risk level is higher, and the returns are also higher.
Hybrid funds at an overall level have a moderate risk level and return level when compared to equity and debt independently. These funds are suitable ideally when an investor is looking to invest for a 2-5 year horizon.
Based on the Constitution
Mutual funds can be categorized based on different attributes such as risk, asset class, constitution, and the likes. Based on the constitution, mutual funds can be classified as open-ended funds and closed-ended funds.
These funds do not have any constraints in terms of the number of units or number of investors who can trade in the fund. These funds are freely available for making or redeeming investments. The investment in these funds can be made based on the NAV (Net Asset Value). These funds may decide to stop taking investment after the corpus reaches a certain size.
These are the funds where the fund house offers a fixed period for subscription. These funds are made open for investments to an investor at the time of NFO (New Fund Offer).
In this type of funds, units are issued at the par to investors who subscribe during the window. Also, for exit these funds, either get listed on an exchange or buys back the unit as per the NAV.
An interval fund is a combination of open-ended and closed-ended funds. When a fund is initially closed-ended and is made open-ended after a certain period is known as interval funds.
To conclude, we can say these are the types of funds based on two key attributes – asset class and constitution. Retail investors are more comfortable with open-ended funds. Also, within the asset class, with the availability of a plethora of opportunities, you must match your objective and your risk appetite with that with the fund.
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