What is Mutual Fund and what are its types?

What is Mutual Fund

Everyone has their interests and goals in life. With the world turning into a globalized one, you might be wondering what are the key steps to take when it comes to investing in your future. This blog article will address whether investing in mutual funds is worth it or not, by explaining its meaning and what are its types, so that you can make your decision.

What is Mutual Fund?

Mutual Fund is a term that refers to pooled funds that are invested either by a company or by an individual. Most of the funds are managed by mutual fund companies, and some are managed directly by the public. Mutual fund companies evaluate the potential risks and rewards for investing in Mutual Funds and decide how much money each investor should contribute based on their risk tolerance.

The fund manager will invest the money you contribute by investing in stocks, bonds, and other financial instruments. These investments are made to earn a high return on investment to cover your costs and hopefully yield a profit for all investors. The investor who initially puts up the money cannot trade the mutual fund’s portfolio without paying an additional fee.

Types of Mutual Fund you must know :

Mutual funds are generally divided into five categories, which are further subdivided based on their nature/purpose.

  • Organization structure
  • Portfolio management
  • Investment goals
  • Solution-oriented
  • Asset class
Types of Mutual Fund

Based on "Organization Structure"

  • Open-ended scheme

    Open-ended mutual funds operate as a continuous scheme, meaning that they can be subscribed to continuously and repurchased on all business days at the current NAV.

  • Closed-ended scheme

    Schemes with a specified maturity date are known as closed-ended. The units are granted at the initial offer and may only be redeemed at the end of the term. Closed-ended schemes must have their units listed on a stock exchange to give investors an exit strategy before maturity, and these units can then be sold or traded.

  • Interval scheme

    Under interval systems, purchases and redemptions are permitted only during designated transaction times. The transaction period must be at least 2 days long, and there has to be at least a 15-day interval between transactions. Interval scheme units are also required to be listed on stock exchanges.

Based on "Portfolio management"

  • Active Fund

    The manager of an active fund is actively involved in the decision-making process. Fund manager uses some styles and strategies to manage the portfolio, including buying and selling securities and selecting which securities to buy or sell.

  • Passive Fund

    Unlike active funds, passive funds have a passive manager who does not make stock selection decisions or decide whether to buy, hold, or sell stocks. The fund manager is only responsible for replicating the Benchmark Index with a minimum tracking error.

Based on "Investment Goals"

  • Growth Fund

    Growth funds are investment vehicles that focus on making money. As you can see, the focus here is mostly on building up assets such as stock. When you invest in growth funds, you need to have a long-term goal in mind. Growth fund returns can be volatile in the short term because the prices of the stocks in the fund can change. So, investors need to be able to handle short-term changes in their returns.

  • Income Fund

    To provide investors with a steady stream of income, Income Funds are created. Fixed-income securities such as corporate bonds, debt instruments, and government bonds make up the majority of the assets held by income funds. In addition to the capital gains from the increased value of the assets, the fund also receives interest on these investments. If the portfolio's expected rates of return are met, the fund will pay out dividends. As a result, no one can count on a steady paycheck. Depending on the maturity and creditworthiness of the securities held, the returns will vary.

  • Liquidity Fund

    Investors wanting liquidity and principal protection with equivalent returns should consider liquid schemes, overnight funds, and money market mutual funds. In Liquidity fund scheme, the funds are placed in money market products with maturities of less than 91 days. In addition, the funds' return will be determined by the market's short-term interest rate. These are perfect for investors who want to keep their excess assets in a safe place for a short length of time.

Based on "Solution Oriented"

  • Tax Saving Fund

    Since its inception, ELSS, also known as equity-linked savings schemes, has steadily risen in popularity among investors of all types. You can profit from asset maximization while also saving money on taxes, and they have the shortest lock-in term of only three years, making them the best option for most people. They are well-known for generating non-taxable returns in the range of 15-20 percent by investing mostly in equity-related products and other assets. These funds are best for salaried people who want to invest for a long time and want to diversify their portfolios.

  • Fixed Maturity Fund (FMP)

    FMPs, which invest in bonds, securities, money market, and more, are a great option for people who don't like debt market trends and the risks that come with them. For example, the FMP is a closed-end plan, which has a fixed maturity date. The period could be one month to five years (like Fixed Deposits). The fund manager makes sure that the money is put into an investment with the same length of time as the FMP to earn interest when the FMP is over.

  • Pension Fund

    Putting a portion of your income into a pension fund that grows over a long time can help you and your family be financially secure after you stop working. This type of fund can help you and your family deal with things like a medical emergency or your kids getting married. Because savings are used up, it's not good to rely on them to get through your golden years.

  • Capital Protection Fund

    If you want to keep your money safe, Capital Protection Funds are a good option. They protect your money while making smaller returns. In this case, the fund manager puts some money into bonds or Certificates of Deposit and the rest into stocks. Though it's very unlikely that you'll lose money, it's best to stay invested for at least three years to protect your money, and the money you make is taxed.

  • Aggressive Growth Fund

    The Aggressive Growth Fund is geared toward making large, quick profits, so it's a little riskier than other investment options. The fund's beta (the technique used to measure the fund's movement in contrast to the market) is used to decide whether to invest in it. If the market's beta is 1, an aggressive growth fund will have a beta of at least 1.10 or more, for example.

Based on "Asset Class"

  • Equity Fund

    Equity funds are predominantly invested in stocks, and as a result, they are sometimes referred to as stock funds. They invest the money that has been pooled together from various individuals with a variety of backgrounds in the shares/stocks of various firms. These funds only make money or lose money based on the performance of the stocks in which they are invested in the stock market. Furthermore, throughout a long period, equity funds have the potential to earn considerable returns. As a result, the risk connected with these funds is also on the rise compared to other types of funds.

  • Debt Fund

    Debt funds are largely invested in fixed-income instruments such as bonds, stocks, and treasury bills, among other things. In addition to Fixed Maturity Plans, they also invest in Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds, and Monthly Income Plans, among other things. The set interest rate and maturity date of the investments make them an excellent choice for passive investors seeking regular income comprised of interest and capital appreciation with a low risk of losing money.

  • Money Market Fund

    Investing in the money market, which is also called the capital markets or cash markets, is like investing in stocks. As part of the government's money-market management plan, it gives out money market securities like bonds and T-bills to banks and other financial institutions. These securities are used to make the money market more stable for the government. The fund manager's responsibility is to invest your money and distribute monthly dividends in return. When investing in mutual funds, choosing a short-term plan can significantly reduce the risk associated with the investment.

  • Hybrid Fund

    They are called hybrid funds because they have the right mix of bonds and stocks to bridge the gap between equity and debt funds. If the ratio isn't set, it could be either variable or fixed. It combines the best parts of two mutual funds by investing 60% of assets in stocks and 40% in bonds, or the other way around. Hybrid funds are best for investors who are willing to take on more risk for the benefit of 'debt plus returns' rather than sticking with low but steady income schemes.

You may read more articles like this on ourĀ Blog page, which will help you to expand your knowledge.

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