Mutual funds are investment vehicles that help you reach your financial goals. Mutual funds have different categories of funds, and you can choose to invest in other funds based on your goals and risk profile and gain from diversification. Mutual funds can be open-ended or closed-ended. You can invest in an open-ended mutual fund anytime; however, in the case of closed-ended mutual funds, you can only do so at the time of the fund launch. Broadly, there are five types of open-ended mutual funds.
Let's have a look at them:
Equity funds
Equity mutual funds invest in the shares or equities of different companies. This means you can invest in the stock market through a mutual fund. With such funds, you can buy and hold securities of various companies across sectors and market capitalizations. The mutual fund performance largely depends on the stock market performance. Thus, equity funds investments are said to be highly risky. Nevertheless, they can deliver significant returns in the long run and are ideal for long-term financial goals. These funds are suitable for investors with a high-risk appetite.Types of equity mutual funds:
- Large Cap Fund
- Mid Cap Fund
- Large & Mid Cap Fund
- Small Cap Fund
- Multi Cap Fund
- Dividend Yield Fund
- Value Fund, Contra Fund
- Focused Fund
- Sectoral/Thematic
- ELSS
Debt funds
Debt mutual funds invest in fixed-income securities such as bonds, government securities, money market instruments, etc. These funds are comparatively low cost, generate relatively stable returns, and are less risky than equity mutual funds as their main aim is generating regular income through interest. Debt mutual funds are usually an excellent alternative to traditional banking products such as bank fixed deposits, term deposits, savings bank accounts, etc. These funds are suited for short-term financial goals when the investor's risk appetite is relatively low and the need for capital protection is higher.Types of debt mutual funds
- Overnight Fund
- Liquid Fund
- Ultra-Short Duration Fund
- Low Duration Fund
- Money Market Fund
- Short Duration Fund
- Medium Duration Fund
- Medium to Long Duration Fund
- Long Duration Fund
- Dynamic Bond
- Corporate Bond Fund
- Credit Risk Fund
- Banking and PSU Fund
- Gilt Fund
- Gilt Fund with 10-year constant duration
- Floater Fund
Hybrid funds
Hybrid mutual funds invest in a mix of equity and debt. The equity component of the fund helps you earn returns, whereas the debt component helps you maintain stability. These funds can cater to investors across the risk spectrum as the portion devoted to equity and debt varies across various sub-categories. Some funds have higher equity exposure, while others have higher debt exposure. Investing in Hybrid Mutual funds is ideally suited for medium-term financial goals where an investor is looking for equal parts risk and capital protection.Types of hybrid mutual funds:
- Conservative Hybrid Fund
- Balance Hybrid Fund, Aggressive Hybrid Fund
- Dynamic Asset Allocation or Balanced Advantage
- Multi-Asset Allocation
- Arbitrage Fund
- Equity Savings
Solution-oriented funds
These funds are designed to help you meet specific long-term financial goals common to most people. The mutual fund industry currently offers funds to suit two of the most famous goals: retirement and children's benefits. Since these funds aim to meet the specified goal, these funds can be equity-oriented, debt-oriented, or hybrid. Mutual funds offer various plans with different asset allocations, and investors can choose any based on their risk appetite and investment horizon.Other funds
Another category is index funds, exchange-traded funds (ETFs), and funds of funds (FoFs). Index funds and ETFs are both passive mutual funds. They track and imitate the performance of a particular index. However, there are specific differences, too. Index funds are mutual funds that seek to replicate the constituents of an index, but ETFs are funds that are listed and traded on exchanges like a company's stock. The NAV of an index fund is calculated like that of an equity mutual fund, whereas the NAV of an ETF is calculated on a real-time basis, like a company's stock price.Therefore, index funds have a higher expense ratio as compared to ETFs. Moreover, the taxation of Index and ETFs depends on their type. For example, sectoral ETFs have the same tax treatment as equity funds, but gold ETFs are taxed like debt funds.
FoFs, as the name suggests, are mutual funds that invest in other mutual funds. Currently, in the industry, we have equity FoFs and gold FoFs, simply called gold funds. Equity FoFs invest in additional equity mutual funds, while gold funds invest in gold ETFs. The advantages of FoFs are that they help get exposure to various mutual funds with one investment. For instance, international FoFs help us gain exposure to global equity markets through mutual funds. Therefore, an investor in India can gain exposure to international stocks such as Google, Apple, Deutsche Bank, and Microsoft or even global themes such as healthcare, technology, etc, by investing in an international FoF.
Similarly, in the case of a gold fund, mutual fund investors can gain access to a gold ETF without having to open a demat account, which is a must for ETF investments. Thus, investors could benefit from an ETF without the hassle of opening a demat account.
Each category of mutual fund has its own benefits and risks. As explained earlier, each category can fulfill a specific financial goal based on investor risk appetite and investment horizon. An ideal investor portfolio should have exposure to different fund categories. By diversifying investments, you can spread the risk across so that the underperformance of a few schemes can be offset by the outperformance of others.
So consult a financial advisor or expert and choose your investments carefully.
