Types of Mutual Funds That One Can Invest In

by Shreya Paliwal Mutual Fund Financial services

Investment of your money is of utmost importance in order to build a secure financial future. One cannot work forever and a strong financial corpus will help you sail smoothly through the days when you are no longer working. In the active working days of one’s life, it is imperative that he/she invest a part of their savings and let the money grow with time.

One of the best options for exercising this is through mutual funds. It is a pool of money from various investors which is professionally managed, invested in diverse places and is available at a low and viable cost. They are a form of investment wherein investors with similar financial objectives invest the money in equities, bonds, securities and/or money market instruments.

The best part about mutual funds is that you can select schemes from various types of mutual funds based on your risk-taking appetite and the investment tenure. Suppose you can take high risk while investing, then you should opt for equity mutual funds, if the investment time horizon is long. Likewise, if the time horizon for investment is short (like a few days or months), and the risk bearing ability not very high, then you can go for debt funds like liquid funds, overnight funds, or short-term funds.

To get a better understanding of mutual funds, we need to know more about the types of mutual funds. Let us discuss some of them

Based on asset class

1. Equity funds - These mutual funds primarily invest in stocks and have the potential to generate higher returns over a longer period.

2. Debt funds – These funds invest in fixed income securities such as bonds, treasury bills, gilt funds, liquid funds, and more. Investors looking for short term investment, coupled with minimal risk, can choose this option.

3. Hybrid funds - As the name suggests, hybrid or balanced funds are an optimum mix of bonds and stocks, thus bridging the gap between equity and debt mutual funds.

Based on investment goals

1. Income funds - These mutual funds invest their money in bonds, certificate of deposits and other debt securities among others. Income funds have historically been able to earn investors better returns than fixed deposits.

2. Liquid Funds - These are a type of debt mutual funds that invest in the money market instruments with a tenure of up to 91 days.

3. Tax saving funds - One of the best options for those investors who are looking to grow their wealth, while saving taxes at the same time. ELSS or equity linked saving schemes are the mutual funds that helps to facilitate this.

4. Capital Protection funds - These mutual funds are a good option for investors for whom protecting their capital is a priority. It tends to earn relatively lesser returns but with safety.

5. Pension funds - Savings tend to get used up in one way or the other so the idea option is to put away your savings in mutual funds. A pension fund is an ideal option as it can act as a source of regular income when you are no longer working.

Above, we have discussed many types of mutual funds, based on various classifications. Types of mutual funds can also be based on structure – close-ended, open-ended or interval funds. Additionally, there are specialized types of mutual funds available as well such as sector funds, index funds, fund of funds and many more.

This read was all about understanding types of mutual funds in India and knowing which works best for you as an investor.