For an individual investor, finding a right mutual fund from different mutual funds types available is not an easy task.
There are several Asset Management Companies (AMCs) in the market. Each AMC manages so many types of mutual fund schemes.
Each scheme is there to serve the different needs of different investors. So, approaching the mutual funds definitely requires some prior knowledge to keep things in place.
Time and again, it is stressed that before going for any investment, you must have a clear GOAL in your mind or rather on paper. Same is true for mutual fund investments.
Having a goal ascertains that you know what you want to achieve by investing. It can be wealth accumulation by capital appreciation, regular income or security of your capital invested.
After fixing a goal, you should decide your time horizon for which you want to invest. Having a goal and time horizon lets you calculate the amount you would need to invest to reach your goal.
This is especially important when you want to invest systematically via Systematic Investment Plan (SIP) route.
For SIPs, you can calculate the required amounts or the target amounts with SIPs Calculators.
Mutual Funds Types and Benefits
To meet different requirements of investment, there are different types of mutual funds available. You can choose best mutual fund for you after understanding about these types of mutual funds.
The mutual funds can be classified on the basis of following two parameters –
- Mutual Funds based on Maturity
- Mutual Funds based on Objectives
Let us have a look at the classification of mutual funds one by one ;
Mutual Funds based on Maturity
These types are on the basis of maturity period of the scheme.
Open Ended Schemes
These mutual fund scheme are open for subscription through out the year. You can buy or sell into these types of mutual funds any time. So these funds don’t have any fixed maturity period.
Closed Ended Schemes
In close ended fund schemes, you don’t have the privilege of entering or exiting the scheme at your will. These schemes are open for a certain period of time when you can subscribe to them.
You can exit out of the scheme only at the maturity of the scheme. The maturity can be any number of years ; 3 or 5 or any as fixed. These mutual funds trade on the exchanges like the stocks.
Mutual Funds Types Based on Objectives
We talked about objectives of individuals who want to invest in mutual funds in one of the above paragraph. To serve these objectives, we have following mutual funds types –
Growth Oriented or Equity Funds
If you want your invested capital to grow for wealth creation, ready to give minimum of 10 years and above to your investment and willing to take risk with your investment, Equity Funds are there for you.
Equity funds consist of a portfolio which includes at least 65% of equities. Having a major portion of equity makes the performance of these funds dependable upon the performance of stock markets.
So we need to give these funds longer time to absorb the market risks and achieve our goal of capital appreciation.
If you want to invest for a period of say 5-10 years and would need your money back by then with decent returns, you may choose a Balanced Fund.
In these funds, the equity exposure is less (nearly 60%) than Growth Funds while giving exposure to Debt instruments like government securities, bonds or corporate fixed deposits, bonds etc ( 40%).
So a balance is created so that equities give growth while debt instruments provide the security.
Fixed Income or Debt Mutual Funds
Debt mutual funds have still lower market related risks and also earn a descent returns on your capital. If you are willing to give a period of less than 5 years to your investment, it may be better to go with debt mutual funds.
At least 60% portfolio of these funds consist of Debt instrument we talked above. You can choose different options like Monthly Income Plan (MIPs) which can be good for regular income on your investment.
Liquid Funds or Money Market Funds are for investors who want to keep their cash in mutual funds for very short periods, usually less than 1 year. Liquid Funds are extremely low risk. The portfolio of these funds consist of very short term securities.
If you want your cash to be available to you at the shortest possible notice in case of requirement and also expect it to earn a good return on your money, you can go for Liquid Fund.
It is better than to keep your money idle in savings bank account (Read more about Liquid Funds) or going for short term fixed deposit. This avoids the risk of premature termination of fixed deposit with a penalty in case of an emergency.
There are sector specific Funds which represent a particular sector of industry like the Pharmaceuticals, IT or Power etc.
The performance of these Funds depends how that sector performs in those times.
Then there are Index Funds which are based upon a benchmark Index. Various Index Funds are like CNX Nifty Fund, S&P Index, Nifty Junior etc.
Another important specific mutual funds are Tax Saver Funds. They give the dual benefit of Income Tax Saving as well as investment purposes.
- You may read about Tax Savings Fund at Equity Linked Savings Scheme (ELSS).
Gilts Funds are the Funds with portfolio consisting entirely of government securities. So they are considered highly safe and secure. However, the returns earned by them are low as compared to other equity based mutual funds.
The performance of any type of mutual funds depends upon the performance of the underlying securities and the efficiency of the Fund Manager.
It is very difficult to predict how a particular Fund will perform in future.
To take a decision on choosing a best mutual fund scheme for you, you can review its past performance although past performance is never a guarantee of future performance.
But that is the risk you take while investing in Mutual Funds.
Warren Buffet says :
‘ Risk Comes From Not Knowing What You Are Doing ‘
Thus when you understand clearly about these different mutual funds types and invest accordingly, you can lower the risk and accomplish your goals.