Mutual funds are basically referred to as a corpus of money accumulated from several investors in order to save money and yield profit from their investments. The corpus of money is invested in various securities such as bonds, stocks, and other money market instruments. In addition to this, profits and losses are shared by all the investors over the period of investment in the proportion of contribution to the corpus.
Mutual funds are basically classified on the basis of investment objective, structure and asset class.
Types of Funds:
A] Types of mutual funds on the premise of investment objective
Mutual funds are categorized on the basis of the securities they have targeted for their portfolios.
1. Growth Funds
The aim of the growth fund is to increase the value of the asset based on the rise in the market price. It’s a diversified portfolio of stocks with very less or no dividend to pay and at above-average risk level. In this, investors mainly invest in equity stocks. Further, these funds are ideal for long term investments.
2. Income Funds
Income funds focus on current income on a quarterly or a monthly basis. Money is majorly invested in fixed-income investment. Further, these funds offer capital protection but the amount of dividend to be paid is much higher as compared with growth funds.
3. Liquid Funds
The sole purpose of liquid funds is to provide liquidity which forces these funds to be idle for short term investments at low risk. Liquid funds invest in instruments like treasury bills, government securities, call money with a maturity of up to 91 days.
B] Types of mutual funds on the premise of the asset class
Mutual funds are classified on the basis of the types of securities that a particular fund may invest in.
1. Equity Funds
Equity funds also known as stock funds primarily invest in equity shares or stocks. They are considered as high-risk funds which yield high returns. Furthermore, equity funds are further classified on the basis of the size of the company in which investors invest. These types are small-cap, mid-cap and large-cap. Large-cap companies have high market capitalization. On the other hand, small-cap companies are new and risky investments. Mid-cap is to fill the gap between large-cap and small-cap.
Equity funds can also be categorized on the basis of their investment approach. These categories are aggressive growth, income-oriented and value.
2. Bond Funds
Bond funds invest and trade solely in bonds and other debt instruments like government bonds, company debentures, corporate, municipal and convertible bonds. These are also known as debt funds.
3. Money Market Funds
Money market funds invest in highly liquid instruments like cash, cash equivalents, and government treasury bills. These funds have a very low-risk level.
4. Hybrid Funds
Hybrid funds invest in diversified investment instruments at times when debt is lower than equity or vice-versa. Primarily these funds invest in a mixture of stocks and bonds. Balanced funds are a type of hybrid fund. As the name suggests, balanced funds strike the balance between risk and return.
5. Index Funds
Index funds specifically invest in the specified index on the exchange in order to yield returns and observe movements of the index. For example, purchasing Nifty50Index fund.
6.Global and International Funds
Global funds can invest anywhere around the world, including their domestic country. On the contrary, international funds can only invest in investment instruments which are located outside their country. The risk factor involved and the returns are always volatile with these funds.
7. Funds of Funds
Instead of investing directly in bonds, stocks, and other types of securities, funds of funds invest in other types of funds. Moreover, these funds aim to achieve broad diversification and low-risk rate. Funds of funds generate high investment fees.
C] Types of mutual funds on the premise of the structure
Depending on the structure of mutual funds, they are classified as follows:
1. Open-end funds
In open-end funds, purchase and redemption of shares happen on demand at their Net Asset Value (NAV). These funds are highly liquid and are always open for investment.
2. Closed-end funds
Closed-end funds are created when an investment company raises money through an IPO. Their shares are then listed for trading on a stock exchange. Closed-end funds yield higher returns than open-end funds. Whereas, these are less liquid than open-end funds.
3. Exchange-traded funds
Exchange-traded funds (ETF) can be purchased and sell since they have a price associated with it. Moreover, it includes all types of investment instruments like stocks, commodities, or bonds. ETF can own a huge amount of stocks across several industries. Or else, it could stick to one particular industry or sector. These funds own the assets from which derivatives derive their value. For example, Kotak NV 20 ETF, Reliance ETF NV 20.
4. Tax saving funds – (ELSS)
Tax savings funds are also known as Equity Linked Saving Scheme (ELSS). This scheme helps investors to claim tax deductions under the Income Tax Act. One can get a tax deduction under 80(c). In addition to this, this scheme has a high risk involved.
D] Specialty Funds
These are the special funds that don’t belong to the rigid categories mentioned above.
Sector funds invest in the specific sector or division of the economy such as financial, technology, health which makes returns on these funds volatile. Risk level and returns vary from sector to sector.
Regional funds focus on a specific geographic area or region of the world. These funds make it easier to buy stock in foreign countries. Despite being easy while buying, these funds include high risk.
Socially-responsible funds also known as ethical funds invest only in companies that meet the criteria of certain guidelines or beliefs. So for example, some socially responsible does not invest in tobacco, alcoholic beverages, weapons or nuclear power industry. Further, the idea is to get competitive performance while still maintaining a healthy conscience. On the contrary, such funds may invest in solar or wind power or recycling.
A mutual fund brings together a large group of people and invests their aggregated money in various instruments of investments.
Furthermore, there are various types of mutual funds which are classified based on the investment objective, structure, asset class, investing strategy, region, etc.
In addition to this, the risks involved and the returns vary with the different funds. Also, the investment fees differ with funds.
Mutual funds are easy to purchase and sell. Further, one can buy it directly from the Asset Management Company (AMC) or through a third party.