Types of Mutual Funds
Mutual funds refer to a pool of money assembled by many investors who thrive at saving and making money through their investments. The collection of money so created is invested in numerous asset classes namely debt funds, liquid assets, and many more. Both profit and losses are shared by all the investors in equal ratios as per their ratio of contribution to the entity. It doesn't matter what kind of investor you are, there is a limit to a mutual fund that suits your taste. It is essential to understand that every mutual fund has numerous risk and reward profiles. Usually, the higher the potential return, the greater the risk of the potential loss. While some funds carry less risk than others, all funds have some level of risk, and it’s never possible to alter away all risk even with so-called money market funds. This is the general fact for all investments. Every mutual fund has a predesigned investment objective that adjusts the fund’s assets, sections of the investments, and the strategies of the investments.
Mutual funds are categorized on the following characteristics;
Based on Asset Class
• Equity Funds
• Debt Funds
• Money Market Funds
• Hybrid Funds
Based on Structure
• Open-ended Funds
• Closed-ended Funds
• Interval Funds
Based on Investment Goals
• Growth Funds
• Income Funds
• Liquid Funds
Based on Risk
• Very Low-Risk Funds
• Low-Risk Funds
• Medium Risk Funds
• High-Risk Funds
Specialized Mutual Funds
Here is a detailed explanation of different kinds of mutual funds.
Different Types of Mutual Funds Based on Asset Class
Equity funds
Equity funds are invested in equity shares of the companies. They offer a more significant result which is the reason take are known as high-risk funds.
Debt Funds
Debt funds are invested in debt like government bonds, fixed-income assets, and company debentures. These types of investment offer fixed returns, and hence they are considered to be a safe investment instrument.
Money Market Funds
Some investors trade stocks in the stock market while some trade money in the money market also known as the capital market. It is usually handled by the government or banks by issuing money market securities like T-bills, bonds, etc. They are also called safe investment options.
Hybrid Funds
As the name says, Hybrid funds are a combination of bonds and stocks, thereby filling the gap between equity funds and debt funds. This is perfect for investors who desire to take more risks for a “debt plus returns” advantage instead of sticking to lower but steady income schemes.
Types of Mutual Funds Based on Structure
Open-end Funds
In this type of mutual fund investment, the investor must be willing to buy back shares from another investor at the end of the business day. This kind of investment deals with the units which are bought throughout the year. It provides liquidity to the investor, and that’s why investors prefer them.
Closed Ended Funds
Closed-ended funds are issued only once a year via initial public offering when they are created. Moreover, these shares are listed for the purpose of trading on the stock exchange. Those investors, who don’t want to invest more in the funds, can’t sell their shares. However, they can sell their share to another investor in the market. There may get fewer prices from its net asset value.
Interval Funds
They consist of both open-ended and closed-ended funds. They can be purchased or issued only at particular intervals and wind up the rest of the time. Moreover, there will be no transaction allowed for at least two years. This type of mutual fund is suitable for those who want to save lump sum money for the prompt target.
Types of Mutual Funds Based on Investment Goals
Growth Funds
These plans allow investors to invest their money in equity stocks. The target behind it is that it offers a capital appreciation. These kinds of funds are considered to be risky, and hence they are perfect for long-term investment.
Income Funds
These plans allow you to invest money primarily in the fixed type of income instruments like bonds, debentures and many more. They act as the purpose of offering regular income as well as capital protection to the investors.
Liquid Funds
The money invested in this type of mutual funds is meant for the short term investment. The main objective is to provide liquidity. These schemes offer moderate returns on the investment and short term investment instruments like T-bills, Cps, etc. are required.
Types of Mutual Funds Based on Risks
Very Low-Risk Fund
Liquid funds and ultra short-term funds are generally not risky at all, and they have a low return (6% at best). Investors prefer this to fulfill their short-term objectives.
Low-Risk Funds
In case when there are unexpected national crises, or there is rupee depreciation, fund managers suggest putting money in either one or a combination of liquids. The return could be between 6 to 8%. However, investors are allowed to switch when things become stable.
Medium Risk Fund
In this, medium risk is present, and the fund manager invests only a portion in debt and the rest in equity funds.
High-Risk Funds
This is suitable for those investors who aim for a huge return in the form of interest and dividends. This kind of mutual fund investment requires active fund management.
Specialized Mutual Funds
A mutual fund is primarily investing in securities of a specific industry, sector, or the kind of protection of the region. Specialized mutual funds have a higher risk because of the lack of diversification. However, they also offer a higher reward as compared to other types of mutual funds.
Every type of mutual fund investment has its advantage and drawback. Hence, it is better that you have a clear perception when you want to invest in mutual funds. You should be familiar with the different types of mutual funds. Moreover, you should also know which sector you want to invest your hard-earned money.
0 Comments