Types of Mutual Funds

Types of mutual funds are categorised based on asset class, structure and investment objectives. Right type of investment can be chosen depending on investor's investment goal.

Types of funds based on Asset Class:

  • Equity fund – These types of funds invest in shares of companies/equity stocks. They are seen as the high-risk funds but also yield good returns.
  • Debt Funds – These invest in Debt instruments like government bonds, fixed assets and company debentures. They are considered to be safe investments with fixed returns.
  • Money Market Funds – These funds invest in liquid assets like Treasury bills (t-bills), Commercial papers (CPs) etc. They are short-term income securities. These are good for investors with additional funds in hand for immediate disposal. They yield lesser returns compared to other funds.
  • Balanced or Hybrid Funds – Investment are made in mixture of Asset classes like Equity and Debt funds proportionately. The ratio of investment may vary to balance out the risk involved and returns.
  • Sector Funds - As the name suggests these funds invest in a sector of market eg. Infrastructure funds will invest in companies or instruments related to infrastructure sector. The returns and risk also will be based on the performance of the sector chosen for investment.
  • Index Funds - They invest in investment representing a fixed index on exchange to mirror the movement and returns of the index e.g. purchasing share representative of the BSE Sensex.
  • Tax- Saving Funds - They invest primarily in equity shares. Investments in these are considered for deductions under the Income Tax Act. Investments here yield high returns if the funds perform well, also there is high risk involved in these funds.
  • Fund of Funds - They invest in other mutual funds. Returns will be based on the performance of those funds.

Types of Funds based on Structure

  • Open- Ended Funds - In these types of funds the units can be purchased or redeemed at any time of the year. All purchases and redemptions will be done at prevailing NAVs as on that day. These are preferred by investors as they offer easy liquidity.
  • Close-Ended Funds – These funds allow units to be purchased only during the initial offer period and can be redeemed only after a specified maturity date. These schemes are listed on stock exchange for trade in order to provide liquidity.

Types of funds based on Investment Objectives

  • Growth Funds - In these funds' investments are made primarily in equity stocks to provide capital gains to investors. These involve risk but ideal for long-term investments.
  • Income Funds – In these, funds are invested in fixed-income instruments like Debentures, bonds etc. The purpose investment these are to provide financial protection and regular income to investors.
  • Liquid Funds – In these schemes, money is invested in short-term instruments like T-bills, CPs etc., to provide liquidity. They are less risky yielding moderate returns.