A mutual fund is one of the best ways to invest in the stock market. It collects resources from different investors and invests it in different assets to collectively grow their investors’ portfolio.
As an investor, choosing the mutual fund to invest can get a little tricky. There are several mutual fund houses offering many different types of mutual funds. In such a scenario, knowing the funds out there and knowing your investment objectives can help you choose the right fund.
Types of mutual funds:
There are many different types of mutual funds in India. Depending on the classification, the funds differ. Let us understand the different types of classifications and accordingly, the type of funds:
- Based on assets invested:
Mutual funds pool resources and invest in different assets. Depending on the assets invested in, mutual funds are broadly classified into:
- Equity Mutual Funds:
As the name suggests, these funds invest a majority of their funds into equity shares. Equity mutual funds are riskier to invest in since a majority of their funds are invested in equities. However, these funds also have superior returns as compared to other funds.
Depending on the types of equity shares invested in, these mutual funds are further classified as:
- Large Cap
- Large and Mid Cap
- Mid Cap
- Small Cap
- Equity Linked Savings Scheme
- Sectoral Thematic Funds
- Contra Fund
- Focused Fund
- Debt Mutual Funds:
These funds invest in a range of debt and money market instruments. With durations from 1 day to over 7 years. Since debt instruments have fixed returns, debt mutual funds offer stable returns for the investors.
The different types of debt mutual funds are:
- Overnight funds
- Liquid funds
- Ultra-short duration funds
- Low duration funds
- Money market funds
- Short duration funds
- Medium duration funds
- Medium to long duration funds
- Long duration funds
- Dynamic bond funds
- Corporate bond funds
- Credit risk funds
- PSU/Banking funds
- Gilt funds
- Floater funds
- Hybrid Mutual Funds:
Hybrid funds invest in a mix of equity and debt. Depending on the percentage invested in equity and debt, the different types of hybrid funds are:
- Dynamic asset allocation
- Equity savings
- Other Schemes:
These include schemes such as Hedge Funds, Index Funds, Fund of Funds, Real Estate Funds etc. These funds provide alternate investment options to the investors.
- Based on fund scheme:
This classification is based on the freedom an investor gets to buy and dispose off mutual fund units.
- Close Ended Scheme:
In a close-ended scheme, the investor cannot sell units after he buys them till the end of the lock-in period. Similarly, it is not possible for investors to buy into the scheme after the window closes.
- Open Ended Scheme:
Investors can sell and buy these units at any point of time.
- Based on investment goal:
The main reason to invest in mutual funds is to grow capital. Depending upon the investor, mutual funds can be growth funds or income funds. Growth funds reinvest the dividends to purchase further units and grow the investor’s capital. Income funds distribute dividends and work to supplement the investor’s income.
It is possible to invest in mutual funds either as a lump sum or as a SIP. If you are wondering what a SIP investment is, then this is the right place. A SIP or systematic investment plan is when a pre-decided investment amount is invested at a fixed frequency in the mutual fund. SIP is beneficial because it averages the cost of investment. This helps to grow the value of the fund because the cost of acquisition is reduced.
Now that you know what are the different types of mutual funds, and what is a SIP in mutual funds, you can contact brokerage firms such as Kotak Securities to open a demat account and invest in mutual funds.