Mutual funds are a new age investment tool, helping Indians invest, thanks to their accessibility and intrinsic diversity. When considering mutual funds, you have a wide variety of funds to choose from. It is vital to examine each one, its holdings and purposes and weigh its potential for financial gains and risk of loss.
Mutual funds can help you create a diversified portfolio of investments. If you wish to invest in mutual funds and have acquainted yourself with what is a mutual fund you may have realised it has many varieties. As a beginner investor, it is understandable to get confused as to which is the right investment for you as per your financial goals.
This article explains the different types of mutual funds to help you make an informed decision.
Based on the asset class
- Equity funds
Also referred to as stock funds, equity mutual funds invest principally in stocks of companies by collecting money from different investors with different backgrounds. The returns from these funds depend on their market performance.
- Debt funds
Debt funds invest in fixed income securities such as government bonds, fixed income assets, treasury bills, company debentures, and so on. They carry a fixed interest rate and a fixed maturity date. If you are looking for an additional and regular income, debt funds can be an ideal choice for you.
- Money-market funds
Money-market funds are also referred to as cash market or capital market. These are typically run by banks, government or corporations that issue dated securities, treasury bills and certificate of deposit among others. The fund manager of these mutual fund schemes invests your money and distributes regular dividends in return.
- Hybrid funds
Hybrid funds are a mix of equity funds and debt funds that invest in an optimum blend of bonds and stocks. The ratio can be fixed or variable. Some mutual fund schemes can have a higher density of debt funds, while others may lay importance on equity funds.
Based on investment goals
- Growth funds
Growth funds invest heavily in shares and growth sectors to earn higher returns. Thus, these funds carry a good deal of risk. If you have a higher risk appetite, growth funds can be worth considering.
- Income funds
Income funds buy investments that pay a fixed rate of return. These include high-yield corporate bonds, investment-grade corporate bonds or government bonds. Such funds have a track record of earning better returns than deposits and are well-suited if you have a low-risk tolerance.
- Liquid funds
Liquid funds invest in debt instruments and money-market instruments with a tenure of up to 91 days. You can invest a maximum sum of Rs. 10 lakhs in liquid funds. These mutual funds offer moderate returns and are low on the risk factor.
- Tax-saving funds
These funds invest mainly in equity shares and make you eligible to claim a deduction under Section 80C of the Income Tax Act. For example, Equity-linked Saving Scheme, which qualifies for a deduction up to Rs. 1,50,000 for a financial year.
Now that you know the different types of mutual funds, you can start your mutual fund investment journey. You can either invest in direct mutual funds, invest in mutual funds online or approach an asset management company for buying mutual funds offline.