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Guide to Understand Various Types of Mutual Funds

Are you considering investing in mutual funds? Then you must know about the different types of mutual funds and their features and benefits. Mutual funds can be classified based on different characteristics. If you are a novice investor, you have come to the right place. In this blog, we discuss the different types of mutual funds based on different factors.

Classification of mutual funds based on asset class

  • Debt Funds

As the name suggests, debt funds primarily invest in fixed-income securities like treasury bills, government bonds, gild funds, etc. Since the investments come with a fixed interest rate, and maturity period, it can be an excellent investment instrument for risk-averse and passive investors looking for regular income with minimal risks.

  • Equity Funds

Equity funds primarily invest in high-risk options like stocks; therefore, they are also commonly referred to as stock funds. In equity funds, the money pooled in from different investors with diverse backgrounds is invested in shares and stocks of different companies.

The profits you gain or the losses you incur from your investments in these funds greatly depend on how the shares of these companies perform in the stock market. Although equity funds have the potential to generate valuable returns over a period, the risk associated with them is also higher than debt funds.

  • Hybrid Funds

As the name suggests, hybrid funds or balanced funds are an optimum mix of stocks and bonds. Thus, it bridges the gap between debt and equity funds. The ratio of investment in equity and debt funds can be either fixed or variable as per your needs.

In simple terms, hybrid funds combine two of the most popular types of mutual funds to give investors the best of both worlds. It allows you to invest in both equity and debt funds in the ratio of 60:40 or vice-versa.

A hybrid fund will be a perfect choice if you are looking to invest in mutual funds and get valuable returns with minimal risk.

Different types of mutual funds based on investment goals

  • Income Funds

Income funds belong to the debt mutual funds family that invests in diverse instruments like certificates of deposits, bonds, and securities, among others. These funds are managed by skilled fund managers who maintain their portfolio in tandem with market fluctuations without compromising the portfolio’s creditworthiness.

If you look at the returns rate of income funds, historically, these funds have offered better returns than fixed deposit schemes. You can invest in these funds if you don’t want to take any risk and want to invest for a short period, like 2-4 years.

  • Liquid Funds

Like income funds, liquid funds are a type of debt mutual fund as they invest primarily in debt instruments with a tenure of up to 91 days. The maximum amount you can invest in these funds is Rs. 10 lakhs. Another noteworthy feature of liquid funds is that their NAV (net asset value) is calculated for 365 days, while for others, only the business days are considered.

  • Growth Funds

Typically, growth funds allocate a sizeable portion of investment funds in growth sectors and shares. It is an ideal investment instrument for young investors with a surplus income and idle money. They can invest their funds in funds and get high returns, albeit taking high risks.

Final Word

Apart from the different types of mutual funds discussed above, there are other types like

  • ETFs (Exchange Traded Funds)
  • Gift Funds
  • Funds of Funds
  • Index Funds
  • Interval Fund
  • Closed-ended Funds
  • Open-ended Funds
  • Pension Funds
  • Fixed Maturity Funds
  • Tax-saving Funds

All these funds work differently and have different features and benefits. As an investor, you must assess your goals and risk appetite and invest in a suitable mutual fund scheme accordingly.