What Are Mutual Funds?

When money from various investors is pooled together to be invested in company shares, bonds or stocks, a mutual fund is formed. A mutual fund is then managed to earn the highest possible returns by a professional fund manager.

All mutual funds are registered with SEBI (Securities Exchange Board of India) which ensures a safe and secure mode of investment.

Types of Mutual Funds Based on Asset Class

Asset class-based classification depends on the assets in which a mutual fund scheme has invested. These consists of following funds -

1. Equity Funds:
Equity funds invest in equity (stocks) and related instruments. They carry the highest returns potential as compared to other types of funds but also come with the highest level of risk. Equity funds are generally recommended for investors with a longer investment horizon of at least 3-5 years. Equity funds can be of various types. They can be further classified based on their market capitalisation

2. Debt Funds:
Debt funds invest your money in debt instruments, such as government bonds, company debentures, and other securities that can deliver fixed income. They are generally considered one of the safest types of mutual funds and can be regarded as for short-term and long-term investments.
Just as equity funds, debt funds can be of various types based on the maturity period of the debt and money market instruments.

Apart from these, there are a few other types of debt-funds too, these include:

• Liquid Funds
• Income Funds

3. Balance/Hybrid Funds:
As the name suggests, balanced or hybrid funds are funds that invest in two or more asset classes as per the investment objective and other factors.

Types of Mutual Funds Based on Investment Objective

All the different types of mutual funds have specific investment objectives. While some aim to help you grow your capital, others focus on a fixed income, save taxes, and more.

1. Growth Funds:
The primary goal of such funds is to help you grow your capital in the longer run. These are generally equity funds with higher returns potential but a higher level of risk too. The funds are not recommended for risk-averse investors, primarily when they are investing for a shorter tenure.
2. Liquid Funds:
Liquid funds invest your money in instruments with short to very-short maturities (not more than 91 days) to ensure liquidity. They are low on risk and ideal for short-term investments. But the lower the risk is, the lower is the returns potential too.

3. Income Funds:
If you are aiming to earn a regular income from your mutual fund investment, income fund can be a great option. Money is mostly invested in debentures and bonds that have fixed maturity and provide fixed income.

4. Tax-Saving Funds:
Popularly known as ELSS, these are mutual funds that are eligible for a tax deduction of up to Rs. 1.5 lakhs in a financial year. Tax-saving funds are equity-oriented diversified funds, with more than 65% of the portfolio invested in equity.

Types of Mutual Funds Based on Structure

The classification of mutual funds can also be done based on their structure. There are three different types of funds based on structure-

1. Open-Ended Funds:
Open-ended mutual funds can be purchased and sold throughout the year. These are actively managed funds where fund managers try to invest in instruments with higher returns potential. Buying and selling of open-ended funds are done as per the current Net Asset Value (NAV) of the fund.

2. Close Ended Funds:
Close-ended funds can only be purchased during the New Fund Offer (NFO) period. The investment in close-ended schemes can mostly be redeemed or withdrawn after fixed maturity. These funds are also listed on stock exchanges, but liquidity is generally very low.

3. Interval Funds:
These funds combine the features of open-ended and close-ended funds. The fund house opens the fund for buying and selling at intervals. The fund houses generally repurchase the units from the
investors during the interval period if the investor wants to exit.

4. Gold Fund :
These funds will invest in Gold.

Who Should Invest In Mutual Funds?

Mutual fund schemes are designed based on the specific financial goals for every investor. So, it is ideal for every kind of investor to invest in mutual funds and seek benefits.
For instance, you should invest in mutual funds if you are:

• Retired, and looking for regular income.
• Salaried, and looking to save some amount every month.
• Looking to invest a lump sum amount of money for a longer term to reap benefits later.
• Looking to make a short-term investment to say, for example, buy a car, go for a vacation, or buy a house.
• Looking to save tax and at the same time grow your investment returns.

We may have skipped many reasons that one might want to make investments for. The point is, anyone who wishes to grow their wealth and earnings, should start investing!

SELECTING THE RIGHT MUTUAL FUND FOR YOUR INVESTMENT
Now that you know a little more about mutual funds and its types, you are more equipped to make the right decision.
But before investing, make sure that you do understand the selected fund type in detail. Select a reputed fund house and focus on factors like your risk appetite, investment horizon, and financial goals to invest confidently and successfully.