Mutual Funds are created so that they travel
the market, spreading around risk to all while at the same time gathering
maximum benefit for the holders. There are certain funds that carry a higher
degree risk under their belt but then, a higher reward quotient as well. Each
variation of Mutual Fund helps the investor in creating a diversified portfolio
of investment and is given based on the risk appetite of each investor.
Below, we have discussed the types of mutual
funds that revolve around an Indian market along with their risk and reward
system to help you in deciding the best mutual funds to
1. Based on Class of the Asset.
- Equity Funds- These types of funds are majorly famous for
their investment in stocks, also making them popular as stock funds. The
dealers in these types of funds pool investment money from a diversified link
of people and invest the money so received in stocks or shares of different
companies for a creatine time. The performance of these companies decides the return
rate of these shares. These types of funds are famous for generating high
returns over a period and as such they possess a comparatively higher degree of
- Debt Funds- These types of funds are suitable for people
who are looking to invest their incomes in some regular plan that guarantees
regular income. These funds are invested by the investors in securities like
bonds, treasury bills, liquid funds, short-term plans, etc which are
fixed-income securities. These investments carry a fixed date of maturity and
interest rate and as such carry minimal risks.
- Money Market Funds- Like equity funds, which are investments in
stock markets, there also exists investment in money or capital markets. These
funds are issued in the forms of treasury bills, bonds certificate of deposits,
etc. these types of investments are often for short-term for a period not
exceeding 13 months and generate regular dividends for the investors, lowering
the risk of investment to a considerable extent.
- Hybrid Fund- These funds are essentially the nuptial between
equity and debt funds, as they carry the features of both. It allows the
investors to invest their investment in both stock and bond, either in a fixed
or variable state. These types of investment plans are suitable for investors
who are willing to take more risk to gain more income than just regular income
2. 2. Structure of the Funds: Every mutual fund is
either an open-ended or
close-ended mutual fund.
- Open-ended Funds: These types of funds are easy and do not carry
any restrictions in terms of period or number of units to be traded. These
funds do not carry a fixed maturity period thereby allowing the investors to
invest in the fund at any time and redeem the same investment based on their
requirement, at the rate of Net Asset Value prevailing during that time. Any
open-ended fund also carries a right to itself wherein they can restrict taking
in any new investors/investment.
- Closed-ended Funds: Unlike open-ended funds, these funds have a
strict period of maturity. Investors interested in these types of schemes
invest at an initial date for a specific period. When that time matures, the
combined benefits are redeemed to the investors.
- Interval Funds: These funds carry the features of both
open-ended and closed-ended funds. The purchase or redemption of these funds is
allowed for a certain period only and are restricted for the rest of the
period. These funds also restrict transactions on them for at least two years. Such
funds are popular among the investors who are interested in saving up an amount
for a short-term period.
3. Based on Goals:
- Growth Funds- As the name suggests, these funds are allocated
in growth schemes and shares that carry a considerable amount of risk, along
with a high degree of return. Suitable for investors that have enough resources
sitting idle with themselves.
- Income Funds- Popular for generating a high income, these
funds belong to the debt mutual funds fraternity wherein the investment is
distributed in a series of bonds, certificate of deposits, etc.these funds are
best suited for the investors who like dodging risk and gaining limited.
- Liquid Funds- These funds are initiated with an amount as
high as Rs.10 lakhs, which is invested in money market instruments for a period
not exceeding 91 days. The most unique feature of these types of funds is in
relation to their Net Asset Value, which is calculated for 365 days, unlike any
other fund which includes only business days.
- Tax saving funds- One of the biggest advantages of investment in
any kind of fund lies in its tax redemption. These funds allow the investors to
enjoy wealth maximization and at the same time save on taxes. The funds in
these types are locked in for the lowest period of three years. These funds are
famously suited for investors that are looking for long-term investment plans.
- Growth Funds- As suggested by their names, these types of
funds provide sharp growth in monetary benefits. Since they carry higher
returns, they certainly carry a comparatively higher degree of risk.
- Funds to Protect Capital- These types of funds
are created to freeze in the contributed capital of the investors for a safe period while
carrying a small portion of returns. The amount in these funds is invested in a
variety of investment schemes as bonds, equities, and Certificates of Deposit.
The returns from these types of funds are taxable under the law.
- Fixed Maturity Funds- It is a form of closed-ended fund
wherein the investors are allowed to invest their sum in securities, bonds,
money market, etc for a maturity period ranging from a month to five years.
This allows the investors to dodge the tax burden and take advantage of triple
- Pension Funds- This is one of the most popular forms of
investment wherein an investor keeps away a portion of his monthly income. This
type of fund is kept to help the investors during tough times in the future and
is more beneficial than mere savings.
There are many other variations of mutual funds
as well, depending on risk, and specialization of funds. To further ease the
work, SEBI deals in a list of guidelines, distributing the companies in
small-cap, large-cap, and mid-cap genres. These are explained as:
4. Investment Approach - Different styles of
investment carry diversified risks and potential benefits. These are:
- Large Cap: These comprise the top 100 companies in
accordance with market capitalization.
- Mid Cap: This list comprises the companies from 101st
until 250th in accordance with market capitalization.
- Small-Cap: The companies post the 250th company in terms
of market capitalization.
- Top-down Approach: This type of approach considers the big picture
in action and invests only in the companies that are expected to be performing
exquisitely well in the economy and within a specific industry.
- Bottom-up Approach: The investments are made in certain companies
that perform well irrespective of their prospects in the industry and economy.
- Mutual top-down and bottom-up Approach: This is a case when the
investment manager deals at a global level wherein he can invest in any country
based on a top-down approach, stocking up within them based on a bottom-up
Technical Approach: This
approach takes into consideration past market data and its analysis to decide
current investment plans.