What are the types of mutual funds? 6 reasons to invest in one

Posted by swarali chavan on April 21st, 2019

Mutual fund investments are of various kinds, and they cater to different needs of the investors. The types of mutual funds are classified by – investment objective, structure, and nature of the schemes. Investment objectives have their sub-types such as equity funds, debt funds, tax-saving funds, liquid funds, balanced funds, gilt funds, and exchange-traded funds (ETF).

When you see it from the structure point of view, they are of two types – close-ended and open-ended schemes. Nature wise, mutual funds are classified as equity, debt, and hybrid.

Let us learn about some popular types of mutual funds in India:

1)      Equity funds: They primarily focus on equity and equity related instruments. The capital gains are either medium or long-term. They are ideal for high-risk appetite investors and are susceptible to market conditions. The plus point is, they offer high returns.

2)      Debt funds: They invest in fixed-income assets such as debentures, corporate bonds, commercial papers, Government securities, and other such instruments. Investors who seek average returns and are risk-averse can opt for such funds. They are best for fulfilling long-term goals.

3)      Balanced funds: They invest in a combination of assets, i.e. equity and debt. You can receive regular income and growth from such funds. Investors who can consume moderate risk can opt for such funds.

4)      Tax-saving funds: If you are looking to earn capital and save tax as well, tax-saving funds are appropriate. You can enjoy tax deductions in ELSS funds up to INR 1.5 lakh under Section 80C of the Income Tax Act, 1961.

5)      Exchange-traded funds (ETF): These funds trade in the stock exchange and owns an array of assets such as gold bars, bonds, oil futures, foreign currency, etc.

6)      Open-ended and close-ended schemes: In open-ended schemes, units are bought and sold continuously. So, investors can enter and exit as per their convenience. The funds are purchased and sold under NAV. It is the complete opposite in close-ended schemes. You cannot buy units after the New Fund Offer (NFO) has passed. It also means you cannot exit the scheme anytime.

Now that you are aware of the types of mutual funds, here are some reasons why you must invest in one:

• You receive professional assistance from the fund houses
• You get higher returns in comparison to a savings account and fixed deposits
• You can hold a diverse portfolio as you get to invest in a wide range of asset classes and stocks
• Investment in mutual funds is quick, hassle-free, and simple owing to the mutual fund investment app
• You can either invest in a lump sum or via SIP. The latter requires only a minimum investment of INR 500

If you opt for SIPs, you cultivate a regular investing habit