What are the Different Types of Mutual Funds in India?
Most of us have heard about mutual funds but do not exactly understand the whole concept of it. Well, mutual funds are an investment tool which helps pooling funds from various investors to invest in stock market, bonds, assets etc. This helps in creating a diverse portfolio with distributed risk and improved returns.
The best part about mutual funds is that it is operated by professional money managers by studying market trends. These relationship managers invest money in funds to make profits for their investors by charging a small commission.
In India, there are different types of mutual fund schemes which cater to different needs of investors depending on their risk appetite, funds and market preference. Here are some mutual fund types for you:
Equity funds
As the name suggests, it invests the funds collected from various investors into equities like shares of companies. The returns on the investment depend entirely on the performance of the shares in the stock market.
It has the potential of giving higher returns, but it also carries greater risk. Investors can get greater returns from it if they invest in it for a longer-term.
Debt funds
Under this scheme, investments are made in fixed income securities like government bonds and corporate debentures. It is less volatile as compared to equity funds and provides fixed returns after maturity.
Debt funds are preferred by investors who like to get small but assured returns within a fixed period and with minimum risk.
Hybrid funds
Also known as balanced funds, it is a perfect mix of bonds and stocks, and the ratio can be fixed or variable depending on the investor. This mutual fund scheme actually takes the best of equity and debt for giving higher returns by balancing risk. For example, investing 60% on equities, expecting higher returns and 40% on bonds for balancing risk.
Equity-linked saving scheme funds
ELSS mutual funds focuses on investing in equities, and is preferred by investors who want to build up their wealth and save taxes. This type of investment suits salaried investors who want to make long term investments.
Index funds
The performance of index fund is linked to the results of the market index like BSE & NIFTY. The portfolio comprises of stocks that represent an index and the returns will be more or less similar to those generated by the market index. Index funds are known for their low operating expenses and broad market exposure.
Sector-specific funds
Investment made under this fund are in securities of a certain sector or industry like IT, FMCG, etc. Returns on these type of funds are depended on the performance of the respective sector or industry.
Sector funds allow investors to diversify their funds across multiple companies within an industry. But these funds are riskier as the performance is directly linked to that of the overall sector. Thus, market fluctuations can trigger a lot of effects on sectoral funds. One must always try to create a diverse portfolio and not focus on a particular industry.
Money Market funds
Those investors who are looking out for liquidity and moderate-income prefer this scheme. Under this scheme, investments are made on shorter-term and safer instruments like on treasury bills, certificate of deposit, etc which are issued by governments, banks and corporations.
Investing in mutual fund can be overwhelming, you must read and understand the working of each fund before you invest in order to maximize your returns. So, choose from the various mutual fund schemes available that suits you the best. Happy Investing !
