- Currently, there are 44 registered mutual fund companies in India offering a variety of schemes.
- Equity funds are risky investment vehicles meant for long term investment.
- Unlike equity funds, debt funds are for short term goals that offer steady returns.
Mutual funds are by now a very popular investment vehicle, but many of us still don’t know what it is and what kind of mutual funds are available to invest in.
Firstly, a mutual fund (MF) is a pool of money collected from many investors, which later gets invested in buying stocks, bonds etc., by a professional fund manager on behalf of investors. The fund manager aims to invest in quality financial instruments and make the most out of these investments. The fund manager attempts to create higher wealth over that investment base.
Currently, there are 44 registered mutual fund companies in India offering a variety of schemes to satisfy the dynamic needs of diverse investors. Each MF scheme has a different objective towards investment. So, an investor needs to pick the mutual fund that suits his/her needs and risk profile.
Let’s get to know some of the common type of mutual funds:
One of the most popular types of mutual fund is equity. Equity mutual funds invest money in company’s shares and their returns depend on how the stock market performs. Such funds are generally considered more risky as the equity market happens to be very volatile. Now equity funds can be classified into types of schemes such as large cap, mid-cap, small cap, flexi cap and so on.
Invest in equity schemes only if you have a long term investment horizon and high risk appetite as equities beats inflation over the long term like 7-10 years. The main objective of these funds is to achieve long-term capital growth. Equity funds invest at least 65% of their corpus in equity and equity-related securities. These funds may invest in a wide range of industries or focus on one or more sectors.
Risk in such mutual funds are associated with a company the fund has invested in. Suppose if a stock of a company, the underlying fund has invested in, declines. The decline will reflect your returns as well. Also, remember, it is not the only company the fund has invested in, the other companies in the fund can offset the losses.
Sector specific funds
These are mutual funds that invest in a specific sector. These can be sectors like technology, infrastructure, banking, mining etc., or specific segments like mid-cap, small cap or large cap segments.
An index fund is a mutual fund that imitates the portfolio of an index. Such funds promise to deliver returns same as the index they are mirroring. For instance, if a fund is attached to the BSE Sensex, then your fund returns will be almost equal to that index. An index mutual fund follows the same strategy as the index it is based on.
Tax saving funds
Tax saving funds, typically known as equity-linked saving schemes (ELSS) is another type of equity scheme. Such funds offer tax benefits to investors. The investments in the scheme are eligible for tax deduction under section 80C of the Income Tax Act, 1961.
Such schemes are for specific goals like collecting funds for children’s education or marriage, or for retirement. They come with a lock-in period of at least five years.
Debt funds invest a majority of the money in fixed income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments etc., that offer capital appreciation. Debt funds are also referred to as fixed income funds. Debt funds are comparatively safer than equity funds.
Unlike equity funds, debt funds are meant to fulfill your short-term goals. Also, debt funds are more beneficial than fixed deposits and recurring deposits where you have to stay invested for a pre-committed period or have to pay a fine in case of early withdrawal. Low cost structure, relatively stable returns and relatively high liquidity are some other benefits of investing in debt funds.
It is usually recommended to hold a percentage of your total investment in debt for steady returns in not-so-risky funds. Liquid fund is among popular debt funds to invest in the short term. There are other schemes as well like short duration funds, ultrashort duration funds, gilt funds, money market funds and so on.
Mutual fund type based on duration
If you choose to invest in an open ended mutual fund scheme then you can withdraw anytime from these funds as they do not have a fixed maturity period.
In closed-ended mutual funds, your investment is locked in for a specified period of time with a fixed maturity date. An investor can enter these types of mutual funds only during the new fund offer (NFO) period and redeem on the date of maturity which is typically 3-7 years. Besides, closed-ended schemes are listed on stock exchanges and one can attempt to sell them before maturity, however they generally trade at a discount.
An NFO is when a fund house launches a new mutual fund scheme to raise capital to operate a fund.