What are Mutual Funds?
Mutual funds are the schemes from various investors which invest in various stocks, securities and bonds depending on the investment objectives of the schemes and the organization which does this is known as Mutual fund House. Mutual funds are of various types such as HDFC Mutual fund, ICICI Mutual fund, Birla Mutual funds, Tata Mutual funds, Quantum mutual fund etc. These mutual fund houses float various mutual fund schemes. However, each scheme would have its own investment objective. Hence it is important to understand the various types of mutual funds in India and which one is liable to invest in.
Types of Mutual Funds Based on Maturity:
Based on maturity there are two kinds of mutual funds:
- Open ended Schemes: These are mutual fund schemes which are open for subscription at any time during the year. Means you can purchase them on a daily basis based on their Net Asset Value (NAV) which is determined by mutual fund houses and for such mutual fund schemes there is no maturity date. These would continue to invest in the stock market, securities, etc. based on investment objectives.
- Close ended schemes: Close ended schemes are those where the maturity date is fixed. There are two types of mutual funds in close end schemes which are described below.
- Fixed Maturity Plans: Mutual fund schemes where no date is fixed for maturity and which cannot be redeemed during the period. However, as an alternate route, one can find a buyer in stock exchange and sell those units to them.
- Capital protection plans: Mutual fund schemes which protects the capital means their objective is capital protection and not taking much risk. Generally the returns are low in such MF schemes.
Types of Mutual Funds Based on Investment Goals:
There are investors whose investment goals are different. Some think they need regular income, but something that they want to grow their money over a period of time. So based on investment goals there are two kinds of mutual funds.
- Growth option in mutual funds: Mutual fund schemes that aim to provide growth for the investment in the long term are growth mutual funds. If you are young and started earning in your career, this is the best way to invest. Such mutual fund schemes keep earning returns, however, they would be paid only during redemption or at maturity.
- Dividend option in mutual funds: Mutual fund scheme which provide income by way of dividends. Since dividends received from mutual funds are not taxable, this can be treated as one of the best ways to have tax free income. This fund is mostly suitable for those who want to enjoy returns every year instead of enjoying at maturity.
Types of Mutual Funds Based on Investment Objectives:
Based on investment objectives there are various mutual funds some of them are listed below:
- Index Mutual funds: As the name indicates, mutual fund schemes that invests in Index (Sensex, Nifty, Banking Nifty, etc.) and would perform in line with the index are index mutual funds. However, MF houses would not be researching any particular stock here. They blindly invest in Index stocks. Hence returns are limited.
- Equity mutual funds: Equity mutual fund schemes invests more than 65% of its portfolio in equity related stocks and instruments and balance in debt securities and bonds. Such schemes would research and invest in a variety of stocks depending on investment objectives. There could be large cap funds, mid-cap/small-cap funds, sector based funds etc.
- Balanced mutual funds: Mutual fund schemes where the investment can be up to 65% in equity and remaining in debt securities. The advantage with these schemes is they can reduce stock exposure quickly and invest the majority in debt securities depending on market conditions. These are somewhat medium risk mutual funds.