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Types of Mutual Funds

Mutual funds have been gaining a lot of popularity in the recent past as an effective investment channel. Choosing the right type of fund for your investment needs will depend on your investment goal.

Types of Mutual Funds
Types of Mutual Funds

The most popular types of mutual funds in India are listed below:

  • Equity funds
  • Debt funds
  • Money market funds
  • Index funds
  • Balanced funds
  • Income funds
  • Fund of funds
  • Specialty funds

There are several other types of funds offered by the asset management companies in the country. We have segregated the same based on structure, asset class, investment objective, specialty, and risk, in the sections below.

Types of Mutual Funds based on structure

  • Open-Ended Funds: These are funds in which units are open for purchase or redemption through the year. All purchases/redemption of these fund units are done at prevailing NAVs. Basically these funds will allow investors to keep invest as long as they want. There are no limits on how much can be invested in the fund. They also tend to be actively managed which means that there is a fund manager who picks the places where investments will be made. These funds also charge a fee which can be higher than passively managed funds because of the active management. THey are an ideal investment for those who want investment along with liquidity because they are not bound to any specific maturity periods. Which means that investors can withdraw their funds at any time they want thus giving them the liquidity they need.
  • Close-Ended Funds: These are funds in which units can be purchased only during the initial offer period. Units can be redeemed at a specified maturity date. To provide for liquidity, these schemes are often listed for trade on a stock exchange. Unlike open ended mutual funds, once the units or stocks are bought, they cannot be sold back to the mutual fund, instead they need to be sold through the stock market at the prevailing price of the shares.
  • Interval Funds: These are funds that have the features of open-ended and close-ended funds in that they are opened for repurchase of shares at different intervals during the fund tenure. The fund management company offers to repurchase units from existing unitholders during these intervals. If unitholders wish to they can offload shares in favour of the fund.

Types of Mutual Funds based on asset class

  • Equity Funds: These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns. Equity funds can include specialty funds like infrastructure, fast moving consumer goods and banking to name a few. THey are linked to the markets and tend to
  • Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns. These funds do not deduct tax at source so if the earning from the investment is more than Rs. 10,000 then the investor is liable to pay the tax on it himself.
  • Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns. Money markets are also referred to as cash markets and come with risks in terms of interest risk, reinvestment risk and credit risks.
  • Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the proportion of equity is higher than debt while in others it is the other way round. Risk and returns are balanced out this way. An example of a hybrid fund would be Franklin India Balanced Fund-DP (G) because in this fund, 65% to 80% of the investment is made in equities and the remaining 20% to 35% is invested in the debt market. This is so because the debt markets offer a lower risk than the equity market.

Types of Mutual Funds based on investment objective

  • Growth funds: Under these schemes, money is invested primarily in equity stocks with the purpose of providing capital appreciation. They are considered to be risky funds ideal for investors with a long-term investment timeline. Since they are risky funds they are also ideal for those who are looking for higher returns on their investments.
  • Income funds: Under these schemes, money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. with the purpose of providing capital protection and regular income to investors.
  • Liquid funds: Under these schemes, money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are considered to be low on risk with moderate returns and are ideal for investors with short-term investment timelines.
  • Tax-Saving Funds (ELSS): These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
  • Capital Protection Funds: These are funds where funds are are split between investment in fixed income instruments and equity markets. This is done to ensure protection of the principal that has been invested.
  • Fixed Maturity Funds: Fixed maturity funds are those in which the assets are invested in debt and money market instruments where the maturity date is either the same as that of the fund or earlier than it.
  • Pension Funds: Pension funds are mutual funds that are invested in with a really long term goal in mind. They are primarily meant to provide regular returns around the time that the investor is ready to retire. The investments in such a fund may be split between equities and debt markets where equities act as the risky part of the investment providing higher return and debt markets balance the risk and provide lower but steady returns. The returns from these funds can be taken in lump sums, as a pension or a combination of the two.

Types of Mutual Funds based on specialty

  • Sector Funds: These are funds that invest in a particular sector of the market e.g. Infrastructure funds invest only in those instruments or companies that relate to the infrastructure sector. Returns are tied to the performance of the chosen sector. The risk involved in these schemes depends on the nature of the sector.
  • Index Funds: These are funds that invest in instruments that represent a particular index on an exchange so as to mirror the movement and returns of the index e.g. buying shares representative of the BSE Sensex.
  • Fund of funds: These are funds that invest in other mutual funds and returns depend on the performance of the target fund. These funds can also be referred to as multi manager funds. These investments can be considered relatively safe because the funds that investors invest in actually hold other funds under them thereby adjusting for risk from any one fund.
  • Emerging market funds: These are funds where investments are made in developing countries that show good prospects for the future. They do come with higher risks as a result of the dynamic political and economic situations prevailing in the country.
  • International funds: These are also known as foreign funds and offer investments in companies located in other parts of the world. These companies could also be located in emerging economies. The only companies that won’t be invested in will be those located in the investor’s own country.
  • Global funds: These are funds where the investment made by the fund can be in a company in any part of the world. They are different from international/foreign funds because in global funds, investments can be made even the investor's own country.
  • Real estate funds: These are the funds that invest in companies that operate in the real estate sectors. These funds can invest in realtors, builders, property management companies and even in companies providing loans. The investment in the real estate can be made at any stage, including projects that are in the planning phase, partially completed and are actually completed.
  • Commodity focused stock funds: These funds don’t invest directly in the commodities. They invest in companies that are working in the commodities market, such as mining companies or producers of commodities. These funds can, at times, perform the same way the commodity is as a result of their association with their production.
  • Market neutral funds: The reason that these funds are called market neutral is that they don’t invest in the markets directly. They invest in treasury bills, ETFs and securities and try to target a fixed and steady growth.
  • Inverse/leveraged funds: These are funds that operate unlike traditional mutual funds. The earnings from these funds happen when the markets fall and when markets do well these funds tend to go into loss. These are generally meant only for those who are willing to incur massive losses but at the same time can provide huge returns as well, as a result of the higher risk they carry.
  • Asset allocation funds: The asset allocation fund comes in two variants, the target date fund and the target allocation funds. In these funds, the portfolio managers can adjust the allocated assets to achieve results. These funds split the invested amounts and invest it in various instruments like bonds and equity.
  • Gilt Funds: Gilt funds are mutual funds where the funds are invested in government securities for a long term. Since they are invested in government securities, they are virtually risk free and can be the ideal investment to those who don’t want to take risks.
  • Exchange traded funds: These are funds that are a mix of both open and close ended mutual funds and are traded on the stock markets. These funds are not actively managed, they are managed passively and can offer a lot of liquidity. As a result of their being managed passively, they tend to have lower service charges (entry/exit load) associated with them.

Types of Mutual Funds based on risk

  • Low risk: These are the mutual funds where the investments made are by those who do not want to take a risk with their money. The investment in such cases are made in places like the debt market and tend to be long term investments. As a result of them being low risk, the returns on these investments is also low. One example of a low risk fund would be gilt funds where investments are made in government securities.
  • Medium risk: These are the investments that come with a medium amount of risk to the investor. They are ideal for those who are willing to take some risk with the investment and tends to offer higher returns. These funds can be used as an investment to build wealth over a longer period of time.
  • High risk: These are those mutual funds that are ideal for those who are willing to take higher risks with their money and are looking to build their wealth. One example of high risk funds would be inverse mutual funds. Even though the risks are high with these funds, they also offer higher returns.

How to choose the right mutual fund

With so many different types of mutual funds available in the market, picking one that suits specific investment needs the most is not an easy task. The simplest advice that can be given in that regard is to first understand your own needs. The next step would be to figure out what your goal is? Is it to build wealth quickly, at a moderate pace or at a slow pace. Once that is decided the last main thing to consider is the risk you are willing to take. The highest returns are general observed to come from the funds offering the highest risks. So if you want returns quickly and are willing to take risks than that is the fund to go for. If your objective is to build wealth slowly then going in for a medium or low risk mutual fund is ideal.

Since mutual funds always come with a factor of risk associated with them, no matter how small, it is imperative that investors read their policy documents carefully before investing. It would also be a good idea to read the document to ensure that they, the investors, have understood exactly what they have invested in and all the facilities that are available to them with that investment.

Facts About Tax Saving Mutual Funds

Taxation on mutual funds

  • Some mutual fund types are exempt of taxes
  • No dividend distribution tax is applicable on Equity Funds
  • Mutual funds are not classified as wealth when calculating wealth tax
  • Long term gains are taxed at a lower rate than short term gains

Types of Mutual Funds FAQs

  1. Can I sell my stocks back to the mutual fund if it is a close-ended scheme?
  2. No, you cannot sell your units or stocks back to a close-ended mutual fund after a purchase has already been made. However, you can choose to sell the units based on their ongoing prices through the stock market.

  3. What are interval funds?
  4. These types of funds carry the characteristics of both close-ended and open-ended schemes. Such plans are usually selected when you want to repurchase units of the shares at various intervals during the entire investment period. The asset management company (AMC) generally offers to repurchase the units from existing customers throughout these intervals.

  5. If I want to make a safe investment in mutual funds and want fixed returns, which type of scheme should I invest in?
  6. For an investor looking for fixed returns when making a safe investment in mutual funds, the best option is to invest in a debt fund. Such a fund invests in debt instruments such as government bonds, company debentures, and any other fixed income asset. However, you should consult a financial advisor before investing.

  7. If I am looking for regular income after my retirement, which mutual fund will be best suited for me?
  8. If you want regular returns around the time of your retirement by investing in a long-term mutual fund, then the pension funds might be the right option for you. However, it is better if you consult a financial advisor before making an investment.

  9. Which mutual fund invests in other mutual fund schemes?
  10. The fund of funds schemes usually invests in other mutual fund schemes to help investors achieve their investment goals.

  11. Which mutual funds offer tax benefits along with high returns?
  12. If your primary investment goal is to receive tax benefits, then the best option for you is to invest in Tax-Saving Funds or ELSS. Such types of schemes predominantly invest in equity shares while the returns of this plan offers tax benefits to the unitholders under the Income Tax Act, 1961. Featuring a high-risk factor, these funds offer high returns based on their performances.

  13. I want to invest in a mutual fund that will offer protection to my invested amount. Which mutual fund scheme should I choose?
  14. Capital Protection Funds are the best bet for individuals who want to ensure protection of their principal invested amount. Under such schemes, the funds are split between investment in equity markets and fixed income instruments.

  15. Is there any type of mutual fund that will allow me to earn a profit when the market is down?
  16. If you want to generate earnings when the markets fall, you can opt for an Inverse or Leveraged Fund. As opposed to traditional mutual funds, these types of funds carry a high-risk factor since they provide substantial earnings only when the markets are down, and tend to go into loss when the markets are doing well. You should only opt for such schemes if you are willing to risk incurring massive losses.

  17. Based on the risk factor, what are the types of mutual funds available in the market?
  18. Depending on the level of risk associated, there are 3 types of mutual funds available in the markets:

    • High risk
    • Medium risk
    • Low risk
  19. What are commodity focused stock funds?
  20. Commodity focused stock funds are mutual fund schemes that primarily invest in the stocks of companies which operate in the commodities market such as manufacturers of commodities and mining companies. These schemes generally provide returns in line with the performance of the commodity in question.

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News About Mutual Funds

  • HDFC MF piped ICICI Prudential MF to grab the top position in India

    Suppressing ICICI Prudential Mutual Fund, HDFC Mutual Fund has become the largest asset management company in India after a gap of more than 2 years. According to the latest AMFI (Association of Mutual Funds in India) data, by the end of December, while HDFC MF has Rs.3.35 lakh crore AUM (Asset under management), ICICI Prudential MF has only Rs.3.08 lakh crore under its management. Compared to the last quarter, the AUM of HDFC MF has increased by 9% in the 3-month period between October-December. On the contrary, the AUM of ICIC Prudential MF has come down by 0.6% during the given period. Earlier, HDFC MF was the largest asset management company in the country till October 2011 and till March 2016 it was the market leader. However, ICICI Prudential MF had slowly overtaken it in terms of AUM on a month-on-month basis and finally reached the top position in 2016.

    22 January 2019

  • Mutual Fund Investment Becomes All the Rage Among Indians

    The share of equity investments in the country of India has increased substantially and has skyrocketed tremendously ever since the rise in mutual fund investment.

    While the area of investment might have remained same as compared to the preceding years, the way (technique) of investing has undergone change and modification. Almost about a decade before the current century, the preferred route of investment was equity investment. The financial year 2018 saw multiple retail investors taking the Systematic Investment Plan (SIP) route.

    The direct retail holding in the BSE 500 index stocks dropped significantly to 11.7%.

    11 January 2019

  • Founder of Jet Airways may lose majority stake if its restructuring plan is implemented

    The State Bank of India (SBI)-led consortium of lenders wants the founder and chairman of Jet Airways, Mr. Naresh Goyal to step down from its board and give away the majority control. The airlines, is at the moment experiencing distress and as a part of the resolution plan, banks want the management to change. Hence, at a recent meeting between representatives of lenders, Etihad Airways, and Jet Airways, Mr. Goyal was asked to give up his board membership as well as the majority control. Some sources have revealed that the son of Mr. Naresh Goyal, Mr. Nivaan Goyal is being considered as a potential replacement of his father on the board.

    The recent meeting was held at the headquarters of Jet Airways which is Mumbai and was chaired by SBI. A representative of Etihad Airways also attended the meeting. Etihad Airways holds a 24% stake in Jet Airways. During the meeting, it was clarified to Jet Airways by SBI that it will not offer any fresh loans until the forensic reports of the company’s books are revealed by Ernst & Young (EnY) who, at the moment, is preparing the reports. Jet Airways has an outstanding loan with SBI of more than Rs.8,000 crore.

    10 January 2019

  • IOC Expected to Purchase 30 Crore Shares Back

    A huge buyback of shares has recently been announced by Indian Oil Corporation and they are planning to purchase over 29.76 crore shares. It further planned to offer an interim dividend at the rate of 6.75 only. The decisions taken by IOC is going to benefit the Indian Government and more than 4 lakh investors, on an individual level.

    The regulatory filing rules and regulations states ‘Buyback of equity shares of the company not exceeding 29,76,51,006 equity shares being approximately 3.06 per cent of the total paid-up equity share capital of the company at a price of ?149 per equity share payable in cash for an aggregate consideration not exceeding ?4,435 crore’. Almost all of the equity investors of the aforementioned company as of the mentioned date, will be permitted to conduct trade of tender shares on a highly proportionate basis.

    The company also further said that ‘The public announcement setting out the process, timelines and other requisite details will be released in due course in accordance with the buyback regulations’. The price of the buyback stands at an 8.6% premium to the closing price of the stocks, as of Friday on the standing BSE. The Indian Government is said to have been targeting a minimum amount of Rs.5,000 crore through the means of share buyback offers of multiple Central Public Sector Undertakings, like BHEL, Coal India, NALCO, NLC, and so on.

    21 December 2018

  • New mutual fund scheme launched by DSP Mutual Fund

    Asset management firm, DSP Mutual Fund has launched a new scheme that would follow the theme of healthcare and pharma. The scheme, known as DSP Healthcare Fund is an open-ended scheme that will make investments predominantly in equity and its related securities of firms dealing in healthcare and pharmaceuticals. A small portion of the investments will also be allocated to foreign securities. The New Fund Offer (NFO) will be open for subscription from 12 November to 26 November 2018.

    The DSP Healthcare Fund is likely to invest up to 25% in stocks of international healthcare, particularly in the stocks of major US firms. The scheme will be benchmarked to the S&P BSE Healthcare Index and will be managed by Mr. Vinit Sambre and Mr. Aditya Khemka. For overseas investments, the fund manager would be Mr. Jay Kothari. There will be no entry load charged to investors but an exit load of 1% would apply if investors exit the scheme before 12 months from unit allotment date.

    14 November 2018

  • SBI’s Revamped Gold Deposit Scheme - 3 things you should know

    This festive season, you can consider investing in SBI’s Revamped Gold Deposit Scheme (R-GDS). The scheme works like a fixed deposit in gold and helps investors earn interest on the gold investments. Here are some things you need to know about the scheme:

      • The motive of the scheme is to ensure that idle gold is mobilised in the country and is put to productive use. Customers get a chance to earn income in the form of interest on the idle gold holdings.

      • Individuals, partnership firms, hindu undivided families (HUFs), and trusts (including mutual funds) can invest in the scheme.

      • A minimum of 30 grams of gold (gross weight) needs to be invested. There is, however, no maximum limit on the investment.

    12 November 2018

  • NAVs of debt mutual fund schemes witness a dip in the wake of IL&FS crisis

    The distress in the NBFC (Non-Banking Financial Company) segment and the defaulting of the IL&FS (Infrastructure Leasing & Financial Services) seem to be creating panic in the debt mutual fund space. 2 debt funds of Tata Mutual Fund recently saw a dip in its Net Asset Value (NAV). Both the funds held papers of IL&FS and this has been the reason for further anxiety among investors. A dip of 5.94% in the NAV was witnessed by the Tata Money Market Fund on 29 October 2019 while there was a dip of 3.2% in the NAV of the Tata Short Term Fund.

    The reason behind the decline in the NAVs of the schemes of Tata Mutual Fund was the writing off the balance of 50% of its investment in the commercial papers (CPs) issued by IL&FS post the failure of the infrastructure firm in making the maturity proceed payments. 29 October 2018 was the day when the CPs were supposed to mature. Fund experts however suggest that investors need not worry about the dip in the NAVs as it will eventually fetch good returns over the long term.

    9 November 2018

  • AMFI urges SEBI to allow side pocketing for IL&FS issued bonds

    The Association of Mutual Funds in India (AMFI) has urged the Securities Exchange Board of India (SEBI) to permit funds that have an exposure to bonds issued by the Infrastructure Leasing & Financial Services (IL&FS) to use side pocketing. Mostly used by developed markets, side pocketing is used to cushion investors, particularly the smaller ones from being impacted by large investors suddenly exiting from exposed funds. The process of side pocketing involves the creation of 2 funds - one holding only the bad papers and another one that holds only the good ones.

    Side pocketing segregates default papers from perfectly liquid papers to create the above-mentioned funds and even though the SEBI is considering AMFI’s proposal, it is concerned about the moral hazards associated with the process. The mutual fund industry was holding papers worth Rs.2,700 crore in a time when the IL&FS had defaulted for the first time. Developed countries that have well-established debt markets, alternative investment vehicles and hedge funds use side pocketing but this is the first time that the mutual fund industry in India is planning to use it.

    7 November 2018

  • Reliance Mutual Funds get ESIC mandate to manage funds

    Reliance Nippon Life Assets Management recently stated that Reliance Mutual Fund, the assets management arm of Reliance Capital, has won the mandate from the Employees’ State Insurance Corporation (ESIC) to manage its funds. The funds were worth Rs.59,400 crore by the end of the last fiscal year.

    Reliance Mutual Fund had locked horns against the HDFC Mutual Fund, UTI Mutual Fund, and HSBC Mutual Fund and claimed the managing responsibility for the ESIC funds. At present, Reliance Mutual Fund is also responsible for the management of the funds of the Employees’ Provident Fund Organisation (EPFO), The Pension Fund Regulatory and Development Authority (PFRDA), and The Coal Mines Provident Fund Organisation (SMPFO). Sundeep Sikka, the ED and CEO of Reliance Mutual Funds said that the mandate reconfirmed that the company had a strong investment process and a consistent track record of delivering returns. At present, Reliance Mutual Funds manages total assets of around Rs.4.1 lakh crore. The total number of investor folios as of June 2018 was 83 lakh.

    30 October 2018

  • Financers in India to repay Rs.1.2 trillion of commercial papers due to mutual funds

    The non-banking financial companies in India face a heavy challenge as they need to repay around Rs.1.2 trillion of commercial papers by the end of 2018. As per data collected by the Securities and Exchange Board of India (SEBI), this will near a record of Rs.1.46 trillion of commercial papers between August and October. This happened due to the fallout of the IL&FS (Infrastructure Leasing & Financial Services Ltd.) group which was responsible for financing some of the major infrastructure projects in India. Financers would find it tough as they depend on the debt issued to India’s money market funds for short-term financing.

    The money market funds that were quite popular over the low-yielding savings accounts suffered worst withdrawals with the issue with the IL&FS. Financing costs have also increased among the credit markets which means this debt will cost more. Mr A.M. Karthik, the sector head at ICRA stated that non-banking financial companies may need to turn to un-utilised bank facilities in order to pay some of the maturing commercial papers. He also stated that the important thing is whether banks would these financiers to make timely drawdowns on such facilities. On a positive note, the central bank has alleviated some rules so that these financers can avail loans more easily.

    29 October 2018

GST rate of 18% applicable for all financial services effective July 1, 2017.

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