WHAT IS MUTUAL FUND? WHAT ARE THE TYPES OF MUTUAL FUND-

WHAT IS MUTUAL FUND;

Mutual funds allow you to put your money with other investors to collectively purchase a diversified portfolio of stocks, bonds, and other securities. These funds are managed by professional money managers who make decisions on which securities to buy and sell, aiming to achieve the fund’s investment objectives. By investing in a mutual fund, you gain exposure to all the investments within the fund and benefit from any income they generate, such as dividends or interest.

Mutual funds offer a wide variety of investment strategies and styles, catering to different risk appetites and financial goals. Whether you are looking for growth, income, or a balanced approach, there is likely a mutual fund that aligns with.

Types of Mutual Funds;

• Types of Mutual Funds based on asset class
• Types of Mutual Funds based on Investment goals
• Types of Mutual Funds based on structure
• Types of Mutual Funds based on risk
• Types of Mutual Funds based on Specialty

Types of Mutual Funds based on asset class;

Equity Funds

Equity funds are mutual funds that invest in the stocks or shares of companies. These funds are considered high-risk but also have the potential to provide high returns. They can include specialty funds focused on specific sectors such as infrastructure, fast-moving consumer goods, and banking, among others. Being linked to the stock markets, the performance of equity funds is influenced by market fluctuations and economic conditions.

Debt Funds

Debt funds invest in debt instruments such as company debentures, government bonds, and other fixed-income assets. They are considered safe investments and typically provide fixed returns. Unlike some other investments, these funds do not deduct tax at the source, so if the earnings exceed Rs. 10,000, the investor is responsible for paying the applicable taxes.

Money Market Funds

Money Market Funds invest in low-risk, short-term securities such as Treasury bills and commercial paper. These funds are designed to provide stability and liquidity while offering modest returns.

Hybrid Funds

Hybrid Funds, also known as balanced funds, invest in a mix of assets, blending both stocks and bonds to aim for growth and stability in a single package. For example, a typical hybrid fund might allocate 60% of its portfolio to equities for potential growth and 40% to fixed-income securities for stability.

Types of Mutual Funds based on Investment goals;

Growth Funds

• Equity stocks of companies with high growth potential.
• Considered high-risk.
• Long-term investors.
• Those seeking substantial returns.
• Best suited for a long-term investment timeline.

Income Funds

• Invest primarily in fixed-income instruments like bonds and debentures.
• Aim to provide capital protection and regular income.

Liquid Funds

• Invest in short-term or very short-term instruments such as Treasury bills (T-Bills) and commercial papers (CPs).
• Offer high liquidity, low risk, and moderate returns.
• Ideal for short-term investment timelines.

Tax-Saving Funds (ELSS)

• Invest primarily in equity shares.
• Qualify for tax deductions under the Income Tax Act.
• High-risk but potentially high returns.
• Feature a minimum lock-in period of three years.

Capital Protection Funds

• Split investments between fixed-income instruments and equity markets.
• Aim to protect the principal amount invested while offering growth potential.

Fixed Maturity Funds

• Invest in debt and money market instruments that mature on or before the fund’s maturity date.
• Provide predictable returns based on the fixed maturity of the investments.

Pension Funds

• Designed for long-term investment to provide regular returns around retirement.
• Typically split investments between equities and debt markets.
• Offer returns in lump sums, as a pension, or a combination of both.

Aggressive Growth Funds

• Focus on high growth potential, leading to steep monetary gains.
• High-risk due to market volatility.
• Performance measured using beta, indicating sensitivity to market movements.

Types of Mutual Funds based on structure;

Open-Ended Funds:

• No specific period or unit limit.
• Allows trading at any time based on prevailing NAV (Net Asset Value).
• Unit capital changes with new entries and exits.
• May stop taking new investors if necessary.

Closed-Ended Funds:

• Pre-defined unit capital for investment.
• Often involves a New Fund Offer (NFO) period with a purchase deadline.
• Comes with a predefined maturity tenure.
• SEBI mandates repurchase options or listing on stock exchanges for exits.

Interval Funds:

• Combine features of both open-ended and closed-ended funds.
• Open for purchase/redemption during specific intervals.
• No transactions permitted for at least two years outside these intervals.
• Suitable for short-term financial goals (3-12 months).

Types of Mutual Funds based on risk;

Very Low-Risk Funds:

• Types: Liquid funds and ultra-short-term funds (one month to one year).
• Risk: Very low.
• Returns: Up to 6%.
• Purpose: Suitable for short-term financial goals and capital preservation.

Low-Risk Funds:

• Types: Liquid, ultra short-term, or arbitrage funds.
• Risk: Low.
• Returns: 6-8%.
• Strategy: Recommended during currency depreciation or national crises.
• Flexibility: Investors can switch to other funds when market conditions stabilize.

Medium-Risk Funds:

• Composition: Mix of debt and equity investments.
• Risk: Medium.
• Returns: 9-12%.
• NAV: Less volatile compared to high-risk funds.

High-Risk Funds:

• Target Investors: Those with no risk aversion seeking high returns.
• Risk: High.
• Returns: 15% on average, potentially up to 20%.
• Management: Requires active management and regular performance reviews.
• Objective: Aim for substantial returns through interest and dividends.

Types of Mutual Funds based on Specialty;

Sector Funds:

• Invest solely in specific sectors.
• High risk due to concentrated investments.
• Offer potential for great returns, especially in growing sectors like banking, IT, and pharma.

Index Funds:

• Suited for passive investors.
• Mirror an index’s performance.
• Low-cost option as they don’t involve active management.

Funds of Funds:

• Invest in diverse mutual fund categories.
• Achieve diversification while minimizing costs.
• Provide exposure to multiple fund types through a single investment.

Emerging Market Funds:

• Invest in developing markets, including India.
• High potential returns but also subject to market fluctuations.
• Expected to contribute significantly to global growth.

International/Foreign Funds:

• Spread investment across other countries.
• Can provide good returns even during strong domestic market performance.
• Offer various approaches like hybrid, feeder, or theme-based allocations.

Global Funds:

• Invest worldwide, including home country.
• Diversified approach but entails risks from different markets and currencies.
• Acts as a hedge against inflation with historically high long-term returns.

Real Estate Funds:

• Provide indirect participation in real estate projects.
• Reduce risks and legal hassles associated with property purchase.
• Offer long-term investment opportunities.

Commodity-focused Stock Funds:

• Ideal for investors with sufficient risk appetite.
• Allow diversification of portfolio.
• Returns based on company performance or commodity prices.
• In India, mutual funds can directly invest in gold, while others purchase shares from commodity businesses.

Market Neutral Funds:

• Aim to protect against market volatility.
• Strive for consistent returns.
• Allow investors to potentially outperform the market with manageable risk.

Inverse/Leveraged Funds:

• Move opposite to benchmark indexes.
• Enable investors to profit from declining markets.
• Strategy involves selling shares at lower prices and repurchasing at even lower costs.

Asset Allocation Funds:

• Combine debt, equity, and gold in optimized ratios.
• Flexible investment option based on market trends or predefined formulas.
• Requires expertise in allocation from fund managers.

Gift Funds:

• Enable gifting of mutual funds or SIPs.
• Provide a way to secure loved ones’ financial futures.

Exchange-traded Funds (ETFs):

• Traded on exchanges like stocks.
• Provide extensive exposure to domestic and international markets.
• Real-time trading potential.

Tax Benefits:

• Section-80C of the Indian Tax Act offers deductions of up to 150,000 from total annual income.
• Tax relief for investments in certain funds.

CONCLUSION-

Investing in mutual funds offers numerous benefits. Managed by experts, they don’t require investors to be market proficient. Most mutual funds are flexible with no lock-in periods, except for ELSS funds. With low investment costs, they are accessible to a wide range of investors. Mutual funds allow for systematic investment plans, enabling small and regular investments. They offer diversification, liquidity, and the flexibility to switch between funds under the same house. Overall, the benefits of mutual funds, including ease of investment, diversification, and liquidity, make them a compelling investment option that should not be overlooked.

nvesting in mutual funds involves risk, and investors should carefully consider their investment objectives, risk tolerance, and financial situation before making any investment decisions. Past performance is not indicative of future results, and the value of investments can fluctuate with market conditions. There is no guarantee that any specific investment strategy or fund will be successful. Investors should read the fund’s prospectus carefully before investing, which contains important information about the fund’s objectives, risks, fees, and expenses. Additionally, investors should consult with a financial advisor or tax professional to determine the suitability of any investment strategy based on their individual circumstances.

Frequently Asked Questions

What is mutual funds with example?

What is mutual funds in simple words? Mutual funds are pooled investments where people contribute money to be collectively managed by professionals, who invest in stocks, bonds, or other securities on behalf of the group.

Are mutual funds safe?

Are mutual fund investments safe? Market-linked mutual funds are subject to market risk that can be caused by several reasons such as changes in policy, macroeconomic conditions, pandemics, poor investor confidence and so on. Therefore it is a good idea to go through document papers carefully before investing.

How to select mutual funds?

To choose a mutual fund, define your investment objectives (e.g., retirement, education, wealth creation), choose a fund category (equity, debt, hybrid) based on your risk appetite, and evaluate historical returns, expense ratios, and fund managers. Which is the safest mutual fund?

Is mutual fund tax free?

Mutual funds are not tax-free except for ELSS (equity-linked savings schemes or tax-saving funds) and some retirement funds. As per the Income Tax Act, under Section 80C, you can claim a deduction of up to Rs. 1.5 lakh for investments made in ELSS and can save taxes up to Rs.