TYPES OF MUTUAL FUNDS

Mutual Funds have many different schemes suitable for different purposes. Some are suitable for growth over long periods, whereas some may be for those in need of safety with regular income, and some provide liquidity in the short term, too. The varied forms of Mutual Funds exist in the country  to cater to different needs of different people.

MUTUAL FUND SCHEMES BASED ON ASSET CLASS:

An asset class refers to a category of financial assets with similar characteristics and nature such as stocks, bonds, real estate or cash equivalents. Based on the asset class in which they invest, mutual fund schemes can be classified as:

1. EQUITY MUTUAL FUNDS: Equity funds purely invests in common stocks of the companies. Equity funds are known for their potential to deliver substantial returns but also comes with higher risk due to market volatility.  According to SEBI guidelines, equity funds should invest at least 65% of their portfolio in equities.
2. DEBT FUNDS: These funds invest in fixed-income instruments like corporate bonds and government bonds, commercial papers, Certificate of deposits ,treasury bills etc. Thus, Debt Funds are safer than equity funds. Investments in debt funds provide a steady income through Interest Income and capital appreciation. These funds are suitable for risk-averse investors seeking capital preservation with minimal fluctuations. Debt funds offer more stable returns than equity funds but still carry risks.
3. HYBRID FUNDS: These funds are a mix of Debt Funds and equity funds. Also known as Balanced Funds as they offer a balance of risk and reward.

MUTUAL FUND SCHEMES BASED ON INVESTMENT OBJECTIVE:

EQUITY SCHEMES:

• Large Cap Funds : In these types of funds, the funds are invested only in top 100 companies in terms of market capitalization*. Large companies fare better in a volatile market as downside risk in these companies is limited as these companies may be market leaders and are of sound financial. Thus this fund is good for investors whose risk appetite is low and time horizon is about 3 years.
• Mid Cap Funds : These funds invest only in 101^st to 250^th companies in terms of market capitalization. These funds are more volatile than large cap funds and less volatile than small cap funds. These companies are having the capacity to grow more rapidly than large caps. This fund is better for investors who seek higher returns with a slightly high risk and the investment time horizon is about 5-6 years.
• Small Cap Funds : These funds invest from 251^st and above companies in terms of market capitalization. These funds are more risky as these companies are small in size but at the same time are having more potential to grow very rapidly over a long period of time. Hence, the returns in these types of funds are higher compared to large and mid-cap funds. It is suitable for investors whose risk appetite is high and time horizon for Investment is long , at least for about 10 years.

*Market Cap = Current Share Price X Total Number of Shares Outstanding.

1. LIQUID FUNDS: These funds are best to park surplus funds for a short period. These funds provide safety of principal amount of the investor along with nominal Return.
2. GROWTH FUNDS: These funds invests in the share of the companies whose main objective is wealth creation and capital appreciation for the long term Investment.
3. INCOME FUNDS: Income funds  invests in debt securities like corporate and government bonds.
4. ELSS(Equity Linked Saving Scheme) Investment up to ₹1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961 in these type of funds. But these funds have a lock in period of 3 years.
5. FIXED MATURITY FUNDS: Fixed Maturity Plan invests in debt Instruments that have a fixed maturity date with a fixed lock in period usually in 1-3 years range. These funds are suitable for short term investors with lower risk.
6. SECTOR FUNDS: Sector Funds also known as Thematic Funds. Sector Mutual Funds are equity schemes that invest in some specific sector or industries. These funds tend to be more risky than the diversified equity funds.
7. INDEX FUNDS: These funds replicate the performance of a specific market index such as Sensex, Nifty etc. The Fund Manager doesn’t play an active role in selecting industries and stocks to build the fund’s portfolio. Hence it is called a passive investment that is the fund manager simply mimics the Index while building the fund’s portfolio.
8. FUNDS OF FUNDS: These funds invest in other mutual funds providing diversified portfolio across multiple funds.
9. EMERGING MARKET FUNDS: These Funds invest in developing economies, offering growth opportunities with a higher risk thus aiming to capitalize on their growth potential. These are risky Investments so the Investor needs to be careful before investing in them.
10. INTERNATIONAL FOREIGN FUNDS: These Funds invest in securities outside the investor’s home country thus diversifying risk and providing global exposure and potentially boosting returns.
11. REAL ESTATE FUNDS: These funds invest in properties thereby providing exposure to the Real Estate market without buying physical assets.
12. COMMODITY FOCUSED FUNDS: These funds invest in companies related to specific commodities, allowing indirect exposure to the commodity market.
13. ASSET ALLOCATION FUNDS: These funds are designed to automatically adjust the portfolio allocation to various assets based on market conditions to maintain risk and return profile.
14. Exchange-Traded Funds(ETFs): The funds which purely invests in any commodity like Gold, Silver, metal etc. are termed as Gold ETF funds or Commodity Funds .They are passive investment instruments that are based on Gold prices. The performance of gold funds is dependent on the movement of stock prices of these companies. As ETFs are listed on an exchange, they offer high liquidity. Hence you can buy or sell your holdings at any time at the real price of gold. These funds offer great opportunity to hold investment for long-term. Gold ETFs is a wiser option than holding it in physical form or investing in a gold fund. 

MUTUAL FUNDS BASED ON STRUCTURE:

1. OPEN ENDED FUNDS: As the name suggests you can invest and redeem your investment whenever you want thus ensuring high liquidity .These funds come with no maturity period. You can conveniently buy or sell your units at Net Asset Value.
2. CLOSE ENDED FUNDS: Close-ended funds come with a fixed maturity period. These funds can only be purchased during the New Fund Offer (NFO) period. These funds are also listed on stock exchanges, but liquidity is generally very low. Once the offer closes, no new investments are permitted. The market price at the stock exchange could vary from the scheme’s Net Asset Value (NAV), because of the demand and supply situation, unit holder’s expectations and other market factors.
3. INTERVAL FUNDS: These funds operate as a combination of open-ended and close-ended funds. They may be traded on the stock exchange or they may even be open for sale or redemption during pr-determined intervals at NAV related prices.

TYPES OF MUTUAL FUNDS BASED ON RISK :

Investment decisions are made based on Investor’s risk tolerance levels. In early or mid-twenties, a person may adopt, a more aggressive approach to investing in equities where as a retiree may prefer risk-averse fixed income investments.

1. LOW RISK FUNDS: These funds are suitable for the Investors who are having surplus funds for a short period of time. These funds include income Funds, gilt funds that have a maturity plan of less than 90 days hence carry the lowest risk.
2. MODERATELY LOW RISK FUNDS: Include Investors who can take nominal risks but also aims at prioritizing the safety of their Investment. These funds include short term and medium term bonds with a maturity period of 91 days till 3 years that also bear minimal risks.
3. MEDIUM RISK FUNDS: These funds include Investors who are seeking to invest for medium to long-term growth with a manageable level of risk for slightly lucrative returns. This category of funds include Hybrid-debt oriented funds, monthly investment plans, and arbitrage funds( that are slightly risky).
4. MODERATELY HIGH RISK FUNDS: The Investors that opt for large cap funds with a long term Investment horizon and are ready to get exposed to some degree of risk are categorized under these funds. Gold ETFs, equity funds , balanced equity-oriented funds with an equity exposure of 20% of their portfolio fall under this category.
5. HIGH RISK FUNDS: These funds like sector specific funds, Micro-cap funds, international funds and aggressive growth funds focus on capital appreciation with higher level of risk. These funds are suitable for investors willing to accept higher volatility in pursuit of higher returns. These funds don’t mind the risk of incurring losses.