There are different types of mutual funds in India available in the market which an investor can choose depending on his profile, risk taking capacity and time horizon.
The classification of mutual funds can be done on either the investment objective or on structure of the mutual fund.
Let’s go through each one of these classifications by looking at the chart below and understand what they mean.
Open and Close Ended Mutual Funds: A mutual fund can be either Open ended or Close ended. Open ended funds can buy and sell its units at any time – so an an investor, you can purchase and sell your holdings in such funds at any time.
Given this, its corpus keeps changing. On the contrary, close ended funds can only be bought by investors buying the period they are up for sale – called the New Fund Offer (NFO) period. Investors can sell them either on the stock exchanges where it is listed or during special buy back periods which the AMC (Asset Management Company) schedules.
Growth and Dividend Mutual Funds : Funds that make your capital grow over a period of time without giving out profits/dividends to you are called growth funds.
In case you received dividends from them, its called a dividend fund. Obviously, in the latter case, since the profits are paid out from the fund corpus, the NAV of the fund will be less while that of the growth option will be more.
Debt Mutual Funds
These invest in commercial papers, certificates of deposits, treasury bills, corporate bonds, debentures and government bonds among others.
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There are other classification of such funds, depending on the maturity of the paper held, for eg, short-term and medium-term to long-term funds.
So these invest in predominantly debt securities and their agenda is to generate stable income for investors with less amount of risk. These shall be covered in a later lesson in more detail.
Equity Mutual Funds
These invest primarily in stocks of companies – in a sense, you own up ending a part of the company when you buy into these. These are meant for long term investments and carry a great deal of risk. Their purpose is capital appreciation over a long period of time.
Diversified Equity funds invest in a wide selection of stocks across different companies and market capitalizations so as to reduce the risk for the investor.
Index funds invest in companies that comprise the benchmark index (say NSE or BSE) and in the same proportion as the index itself. So the returns of these are in line with the index.
ELSS (equity linked savings schemes) or tax saving mutual funds provide tax benefit to investors under section 80(C) and also have a lock-in period of 3 years – this means that as an investor, you cannot redeem(sell) your holdings before three years of buying the mutual fund.
Sector or Thematic funds invest in a particular sector eg, there could be a fund investing in only the banking sector. Similarly, there could be thematic funds investing in a particular theme, example, infrastructure.
Large-cap mutual funds invest in large market capitalization companies. There is no clear definition of what large capitalization means, many AMCs pick the top 100 companies (based on market cap) on the Sensex and call them large-cap.
Similarly, there exists mid-cap and small-cap mutual funds – those which invest in medium market capitalization companies and small market capitalization companies respectively. Among these, large-cap carries the lowest risk while the small cap carries the most risk.
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Hybrid Mutual Funds
Balanced Mutual Funds invest in at least 65% equities and the rest 35% in debt. The debt portion provides stability while the equity portion provides capital appreciation.
Monthly Income Plans (MIPs) are plans which invest around 15%-25% in equities and the rest in debt and money market instruments.
Gold Mutual Funds are those that invest in gold as the underlying assets. International Funds invest in companies outside India.
Exchange Traded Funds(ETFs) are those that are traded on the stock exchange on a real time basis.
Socially responsible mutual funds invest in companies that have social, environmental or moral beliefs and promote the same.
Fund of Funds do not invest in any companies – instead they put in their money into other AMC’s mutual funds.
Real Estate Mutual Funds invest in real estate or lend money to real estate developers.