Different Types of Mutual Funds
11 January, 2024
Want to Begin Investing? Here is Everything You Need to Know About the Different Types of Mutual Funds
Mutual funds have transformed over the years, from occupying a small position in the market, to becoming a substantial part of an investment portfolio. When you invest in a mutual fund, you hold units that represent your stake in the fund as per the amount you invested. You also receive any increase in the fund’s value as per the number of units you own. Since they have become such an integral part of investing in India today, you must be familiar with the types of mutual funds on offer. Knowing the varieties of mutual funds also helps you invest wisely and make the most of the benefits.
Various Types of Mutual Funds You Can Invest in
To make investing easier for a larger demographic, mutual funds are categorised based on your risk appetite, amount, investment horizon, goals, and so on. To help you curate your investments as per your requirements, here are the types of mutual funds you can choose from:
Mutual Funds as Per the Maturity:
Depending on your financial standing and goals, you might be able to invest for a specific window of time. You can invest in three types of mutual funds as per the maturity period:
- Open-Ended Schemes: Such schemes are designed to allow you to purchase and sell units at a given time. There is no fixed maturity date you have to adhere to. Since the objective of this type of fund is to offer liquidity, it allows you to buy or sell units at NAV (net asset value) related prices.
- Close-Ended Scheme: Such schemes come with a maturity period, and you can only invest in the fund during the initial launch period commonly known as the NFO (New Fund Offer). Additionally, the market price may differ from the scheme’s NAV due to fluctuations in demand, supply, and other market forces.
- Interval: A combination of open and close-ended schemes, this type of fund allows you to trade units at predetermined intervals.Mutual Funds as per the Principal Investment:
When it comes to investment strategy and asset allocation, you can choose from the following types of mutual funds:
- Equity Schemes:
When you choose an equity fund, you can invest primarily in stocks. Such funds comprise investing money pooled from various investors into shares and stocks of different companies. The performance of these funds depends entirely on the performance of the invested shares in the stock market. While the risk associated with equity funds tends to be higher, they also have the potential to generate substantial returns. Equity funds further consist of small-cap, mid-cap, and large-cap funds.
- Debt Funds:
With debt funds, you can invest in a range of fixed-income securities such as treasury bills, bonds, securities, and so on. It’s a type of fund that also allows you to invest in several fixed-income instruments, including Gilt Funds, Liquid Funds, Monthly Income Plans, and so on. If you want to invest passively and enjoy a regular income, then debt funds, with a fixed interest rate and maturity date, are a good option.
- Money Market Funds:
Just as investors trade on the stock market, they also do so on the money market/capital market. This market is run by the government in association with financial institutions, banks, and other corporations. They issue money market securities like treasury bills, bonds, certificates of deposit, and so on. Your money is typically invested by a fund manager who also disburses dividends regularly. You can also opt for a money market fund with a short duration to minimise risk.
- Hybrid Funds:
Hybrid funds, also known as balanced funds, are the perfect mix of bonds and stocks. So, this type of mutual fund bridges the gulf between debt and equity funds. While usually such funds allocate 60% of the assets in stocks and the rest in bonds or vice versa, the ratio can be variable.Mutual Funds Based on Investment Goals:
You can also choose to invest in different types of mutual fund schemes as per the financial goals you’d like to achieve. Some of the funds that help you fulfil different target goals are as follows:
- Growth Funds: With allocations in shares and growth sectors, such funds are best for those who have surplus income and a larger risk appetite.
- Income Funds: Falling under the debt fund umbrella, these funds allow you to distribute your investment across bonds, certificates of deposit, and securities. With fund managers who ensure that the portfolio keeps up with rate fluctuations, this scheme is a good choice for risk-averse investors.
- Tax-Saving Funds: Funds like the Equity-Linked Savings Scheme help you maximise wealth while saving on taxes. They are best suited for investors with a longer horizon.
- Solution-Oriented Schemes: Solution-Oriented Schemes: These funds come with a lock-in period of five years, making them suitable for those with certain financial goals, such as retirement or child education planning. They typically offer high yields, making them averse to most short-term fluctuations in the market. Investors can also benefit from the growth of leading companies as solution-oriented schemes are predominantly passively managed mutual funds where the portfolio manager aims to replicate the performance of a benchmark index.
As a side note, before April 2021, mutual funds in India used the term "Dividend Option" to describe a choice for investors. However, this was changed to "Income Distribution cum Capital Withdrawal" (IDCW) by the Securities and Exchange Board of India (SEBI).
IDCW signifies how a mutual fund distributes the income it generates from the investments within the fund. This income comprises two main components: dividends received from stocks in the fund's portfolio and capital gains realized when the fund manager sells stocks. IDCW income is taken from the value of your initial investment. This means that when you receive an IDCW payout, it's essentially like getting back a part of your own invested money. It's not extra earnings or profits; it's a distribution of your original investment. When looking at the IDCW, investors should consider their long-term wealth creation goals, tax implications, and preferences for periodic income distributions.
Now that you know more about the different types of mutual funds in India, you can diversify your portfolio and meet your goals. To invest in a range of mutual funds with the utmost ease, open an Investment Services Account at HDFC Bank today!
* Terms and Conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.
