Types of Mutual Funds in India: All You Need to Know

Types Of Mutual Funds in India: An Overview

Planning to invest in mutual funds? But confused about where to start and which scheme to invest in? If so, then we have got you covered in this article. 

What Is A Mutual Fund?

A mutual fund is a fund that is established in the form of a mutual fund trust. It raises money by selling the units of the mutual fund to the general public under any scheme.

In other words, it is a portfolio of stocks or bonds which are managed professionally by the fund managers. What it does is it pools money from different investors and invests it in various financial assets on the behalf of their investors.

The small investors or the beginners who generally lack the expertise to invest on their own prefer mutual fund schemes in India. It invests the amount and then distributes the returns to the investors. The investors benefit in terms of higher returns and reduced profits.

Now that you have understood what a mutual fund is, let's move on to understanding the different types of mutual funds in India.

Types of Mutual Funds in India

So, how many types of mutual funds are there in India? Come on, let's find out the answer.

In India, Mutual funds are classified based on their structure, investment objective and special schemes. Let us first read about mutual fund types in India based on their structure.

Based on Structure

Based on structure, mutual funds are classified into two types:

• Open-Ended Funds

Open-ended as the name suggests is a mutual fund where the fund buys and sells the units to the Investors themselves. These mutual funds buy and sell the units regularly and they also allow the investors to enter and exit according to their benefit.

Here, the units of the fund can be bought and traded even after the New Fund Offer (NFO) period. All the units are purchased and sold at the net asset value of the fund. Moreover, the corpus of the open-ended funds keeps on changing because of the regular purchase and sales. 

The fund is not listed on the stock exchanges, transactions are generally done by the fund itself. These funds are highly liquid.

• Close Ended Funds

Under the close-ended funds, the fund issues a specific amount of units that are purchased and sold on the stock exchanges. The units are not redeemed once they are issued, they are only redeemed at the end of the tenure.

These funds are introduced by the New Fund Offer to distribute the money and then they are traded in the open market like stocks. The value of the mutual fund depends upon its NAV. However, the actual cost of the fund is determined by the demand and supply.

That means close-ended funds can purchase and sell at a discount as well as a premium to their NAV. The units are generally traded by intermediaries. The maturity of these funds is fixed. In closed-ended funds, generally, two valuers are available which are NAV and Market Trading Price.

• Interval Funds

These are funds that are a combination of both open-ended as well as closed-ended funds. They stay open for the repurchase of shares at different periods during the tenure of the fund.

During these intervals, the fund management company gives an offer to repurchase the units from the unitholders. Moreover, the unitholders can offload the shares in the favour of the fund if they wish to do so.

Based on Investment Objective

Based on the objective of investment, the mutual funds are classified as:

• Growth Funds

They are focused mainly on growth, so they generally invest in equity. These funds offer high income by way of dividends and quick capital appreciation. These types of funds are suitable for investors who have a lot of money.

• Income Funds

These funds focus on giving a fixed income to the investor. So, people who wish to get a fixed income can invest in the income funds.

These funds invest generally in a combination of income assets like bonds, debentures, certificates of deposits and various securities. 

Income funds are managed by highly skilled managers. They are solely responsible for capital protection as well as capital appreciation. This investment is ide for risk-averse individuals, who wish to invest for at least two to three years.

• Balanced Funds

Balanced funds maintain a balance. That means, they invest in a mix of fixed income securities as well as equities. Their main motive is to yield high returns against the risk of losing all the money.

They generally are riskier than fixed-income funds but less risky than equity funds. The aggressive schemes invest in more equities and fewer bonds. On the other hand, conservative schemes invest in fewer equities and more bonds.

• Money Market Funds

These are the short-term funds that generally invest in money market instruments or highly liquid assets.

Examples of money market funds are commercial paper, treasury bills, government bonds and certificates of deposit.  These funds offer a low return comparatively but they are the safest to invest in.

Based on Special Schemes

Based on the special schemes, mutual funds are classified as:

• Index Schemes

This mutual fund scheme is based on popular indexes. These mutual fund schemes copy the business indexes such as NSE Nifty and BSE Sensex. These schemes generally invest in the same weightage as the index.

The net asset value of such schemes rises and falls according to the rise or fall in that particular index. This doesn't necessarily happen by the same percentage (because of tracking error) but happens in the same direction.

All the necessary disclosures are made in the offer document of the mutual fund itself. Also, there are ETFs or exchange-traded funds as well, they are traded on the stock exchanges.

• Sectoral Schemes

This is an equity fund that invests the pooled money of the investors in the same sector in which they belong. These sectoral funds allow the investors to take exposure in some particular sectors of the economy by investing all their money in the enterprises of the same sector.

Conclusion

Here comes the end of our article on " Various Types of Mutual Funds". We have thoroughly described all the types of mutual fund schemes available in the market.

By having an understanding of the different types of mutual funds, you will be able to invest more wisely. This, in turn, will help you in achieving your financial goals. As an investor, you can check all the schemes and invest in the one which fulfills all your objectives.