For the uninitiated, mutual funds can be an excellent investment channel, which pools money from several investors to invest in equities, debts and other money-market instruments. In the last decade, mutual funds have become a popular investment option for investors looking to earn good returns.
If you are a new investor looking to invest in mutual funds online, the article lists the different types of mutual fund to help you decide.
Types of mutual funds
Mutual funds can be broadly categorised into three types:
- Equity funds
These funds invest in stocks of companies of multiple industry sectors such as pharmaceutical, infrastructure, FMCG and more. They are considered high-risk funds and can be suited for aggressive investors with a high-risk appetite. These funds have the potential to offer high returns commensurate with the risk involved.
- Debt funds
Compared to equity funds, debt funds are regarded as less volatile and more stable. They invest in fixed-interest bearing instruments such as government securities, corporate bills, bonds, certificate of deposits, among others. They can be apt for conservative investors looking for stable returns with minimal risks.
- Hybrid funds
Hybrid funds offer a blend of equity and debt funds. The composition of equity and debt can vary for different schemes. In some cases, the equity ratio is higher, whereas in others, the debt portion is higher. These funds offer high returns because of the equity component and stable returns from the debt component.
Other common categories of mutual funds
- Money-market funds
These funds invest in the money market, also known as the cash market or capital market. These include commercial papers, treasury bills, banker’s acceptances and more. They carry a lower risk and offer lesser returns compared to other mutual fund types.
- Index funds
These funds invest money in an index and are a preferred choice of risk-averse investors. An index fund mimics a stock and its corresponding ratio in the market index to invest in similar stocks in a similar proportion.
- Growth funds
These funds invest in growth stocks to provide capital appreciation. Typically, they are high-risk funds and could offer higher returns. They are ideal for investors with a long-term investment horizon to weather market volatility in the long run.
- Liquid funds
These schemes primarily invest in mutual funds of the debt category and money-market instruments with a tenure of up to 91 days. As an investor, you can invest a maximum of Rs.10 lakh in liquid funds.
- Fixed maturity funds
These closed-ended debt funds come with a fixed maturity between one to five years and mainly invest in debt products. These include investments in securities, money-market instruments and bonds. Fixed maturity funds are ideal for investors with a low to moderate risk appetite.
Now that you know the different mutual fund types, you can select the best one as per your risk tolerance level and investment horizon. This can help you reap enhanced mutual fund benefits and make the most of your investment.