Types of Mutual Fund in the Market [Concept]

Mutual fund is very much in trend among common people, the biggest reason for this is that it does not require knowledge of stock market. There are various Types of Mutual Fund in the Market.

So, In this article, we will discuss Types of Mutual Fund in a simple and easy way and try to understand its various important aspects; read this article till the end.

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| What is Mutual Fund?

A mutual fund is a fund that is created when a large number of investors invest their money in it and the entire amount is invested by a management company in shares, bonds or other securities. The profit made from this is distributed among all the investors in the same ratio in which those people invested money.

[Read in details – Mutual Fund Basics: What, When, Why and How?]

| Types of Mutual Funds

There are many types of Mutual Funds based on risk, based on investment or on the basis of structure etc. Let us understand all the important types;

|  Equity scheme

The special feature of this scheme is that at least 65% of the assets of this scheme have to be invested in equity and equity related instruments. In the article on the stock market, we understood that investing in equities is risky. 

That is why these funds are comparatively high risk. The scheme is suited for investors who can digest high risk. Based on the level of risk involved in investing, the following are the types of mutual funds in India:-

| Types of Mutual Funds Based on Risk

⚫ High Risk Funds – As we have just read above, the greater the portion of an investment that is invested in equities, the higher will be the level of risk. If the risk is high, then the return is also highest from this. 

There is also a return of 20 to 25% in this. These funds require active management as they are dependent on market volatility. Such as – ICICI Prudential Technology Fund, Aditya Birla Sun Life India NextGen Fund, SBI Banking and Financial services Fund etc.

⚫ Medium Risk funds – Obviously, in this, less is invested in the equity part and more in the debt fund part. So that even if there is a loss in the equity portion, then it can be compensated from the debt fund. 

Its average return is usually between 9-12%. These are good for investors who do not have a very high risk appetite and want stable returns. Like- SBI Magnum Constant Maturity Fund, SBI Magnum Medium Duration Fund etc.

⚫ Low Risk funds – If there is a crisis in the market and the market becomes volatile, then in such a situation the money is invested through a special safe medium such as an arbitrage fund. 

This is also a type of mutual fund but it works on very low returns without falling into the trap of high returns. For example, if the market stock is bullish, then buy the stock from the cash market and sell a contract for it on the futures market at the same time. It is kept under hybrid scheme.

If the market continues to work normally, then it does not work properly, but as soon as the market fluctuates, this method works in the meantime. 

For example, suppose the value of a share in the stock market is Rs 500 and at the same time in the derivatives market its value becomes Rs 505 for some reason, then at the same time that stock is bought from the stock market and sold in the derivatives market. 

The returns from this are very less but there is no risk in it. Usually it gives 5 to 6% annual return. This type of investment helps in meeting a short term financial goal. Such as – Aditya Birla Sun Life Liquid Fund, SBI Magnum Ultra Short Duration Fund etc.

| Debt scheme

Just as a major part of investment in equity schemes is invested in equities or equities, similarly a large part of investment in debt schemes is invested in fixed income instruments, such as bonds, debt securities and money issued by governments and corporates market Instruments etc. 

Since these funds have a fixed rate of interest, the risk involved is very low. This is a great option for those who do not want to take risks. Such as – SBI Magnum Constant Maturity Fund Regular Growth, ICICI Prudential Constant Maturity Gilt Growth etc.

| Hybrid scheme

It is called a hybrid scheme because the distribution between equity and debt instruments is generally in the ratio of 40:60. However, the ratio can change as per the requirement. 

The objective of these schemes is to provide both growth and regular income. This is a great option for investors looking for moderate growth. Such as – ICICI Prudential Regular Saving Fund, Kotak Debt Hybrid etc.

| Types of Mutual Fund Based on Structure

⚫ Open-ended funds – These types of funds are available for subscription and buyback on an ongoing basis. This means that this type of scheme is not launched with any fixed duration, hence one can invest in it anytime.

Its second feature is that you can come out of it anytime because it does not have any fixed maturity period. Its NAV is fixed on a daily basis and the investor can buy and sell units at the same NAV.

Another great feature of this is that its past performance can be tracked which helps the investor to take the right decision. SIP i.e. Systematic Investment Plan, STP i.e. Systematic Transfer Plan, SWP i.e. Systematic Withdrawal Plan etc. come under this.

⚫ Close-ended funds – This type of scheme is launched with a fixed duration such as 3, 5 or 7 years. Therefore, it cannot be exited until that period is over. Since it can never be exited, its NAV is also not fixed on daily basis.

It can also be invested in this only as long as the investment period is left in it. That is, it cannot be invested when it feels like it.

Under certain circumstances, its units are traded on the stock exchange. It does not have the facility to track past performance, hence the investor may find it difficult to make a decision.

Its specialty is that it provides stability to the scheme and it allows portfolio managers to build a stable asset base and devise the right investment strategy.

⚫ Interval Funds – This is a hybrid fund that has the characteristics of both open ended and closed ended funds. These funds can be bought or sold only at specific intervals as per the discretion of the fund house. The rest of the time the fund is closed.

| Types of Mutual Fund Based on Investment

Following are the types of mutual funds in India based on investment strategy:

⚫ Growth Fund: This is a high risk equity fund in which a major part of the investment money is invested in stocks. This is a good one for those investors who have extra money and are able to invest this money for 5 – 10 years.

⚫ Income funds: It is a type of debt fund that invests money in government bonds, certificates of deposits and securities etc. That’s why the risk is less in it.

⚫ Liquid Funds: This is also a type of debt fund. It invests in short-term fixed-interest generating money market instruments and debt instruments with a tenure of up to 91 days.

The investor can invest only up to Rs 10 lakh and returns are not guaranteed as the fund’s performance depends on how the market performs unlike Fixed Deposits which are not market dependent.

⚫ Tax Saving Fund: Equity Linked Saving Scheme (ELSS) is one of the most popular tax saving schemes. The lock-in period of these funds is 3 years. It also offers a good rate of return and is free from tax.

⚫ Aggressive growth funds: These funds are invested in companies that have high growth potential, especially in new companies. As a result, these funds manage to generate above-average returns when the markets are rising. But if the company does not grow as expected, the loss is certain.

⚫ Fixed Maturity Fund: As the name suggests, this scheme invests for the maturity period. Investment is mainly in bonds, securities, money market etc. The maturity period ranges between 1 month to 5 years.

⚫ Pension Funds: These funds allow one to create a corpus for retirement. Some common pension plans in India are unit-linked which invest in both equity and debt instruments. The government also runs many types of pension fund schemes.

| Special Types of Mutual Fund in India

⚫ Gilt Funds – These funds exclusively invest in government securities. There is no risk of default from these investments.

⚫ Index fund – This is a passively managed fund. That is, it is not actively managed like other funds. That’s why he saves that cost. These funds mimic the portfolio of a particular index like Sensex, Nifty, etc. and invest in securities in the same weightage.

For example, if we talk about the Sensex, there are 30 companies out of which Reliance has 12.78%, HDFC has 12.25% and in the same way the weightage of other 28 companies is divided. 

So 12.78% of the amount invested under Index Fund will be invested in Reliance, 12.25% in HDFC and so on in other 28 companies. As much as the return that the index gives, the same return will be distributed among the investors through the index fund.

⚫ Fund of funds – Its concept is that instead of investing the money of mutual fund directly in equity or debt, it is first invested again in some other mutual fund and then from there this equity or debt is invested in. This makes it more diversified, this is called the Fund of Funds (FoF) scheme.

⚫ International funds – In this type of Equity Mutual Fund, investors invest their investments in shares of companies listed outside India. This means that even when the Indian stock market does not perform well, there is no possibility of much loss.

An investor can also use a hybrid strategy (eg, 60% in national equities and the balance in foreign funds) if he so desires.

⚫ Commodity-focused stock fund – This is one of the types of mutual funds that is a great option for investors trying to diversify their portfolio and who can take substantial risk. 

As the name suggests, it invests in commodities. However, returns are not regular and are based on the performance of the stock company or the commodity itself. 

• Gold is the only commodity where mutual funds can invest directly.

Overall, this is the type of mutual fund, hopefully you will understand. For better understanding, must read other related articles, the link is given below.

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| Share Concept Series (BCS)