During the last 5 years, there has been tremendously good participation by the common investors in mutual funds investments and its related products. The credit for this goes to the Association of Mutual Funds in India or AMFI for coming up with the brilliant campaign “Mutual Funds Sahi Hai“. Not only this but also fund houses organized numerous awareness programs which indeed broadened the investors’ perceptions regarding mutual fund investment to a great extent. In this article, we would learn the 7 Top Best Types of Mutual Funds in India. Different types of mutual funds in India. After reading this article fully you would learn all types of mutual funds that are being operated in India right now.
The AMFI has classified mutual fund schemes into the following 7 broad categories according to their basic investment objectives. They are as follows.
Growth or Equity Fund;
Income or Debt Fund;
Liquid & Money Market Fund;
Equity Linked Savings Scheme(ELSS);
Fund of Funds.
These schemes are further classifieds into different categories as per their characteristics such as asset class, structure, and investment objective. Before the detailed discussion on the types of mutual funds in India let’s just see how mutual funds work in a Flow Chart form.
Primarily there are the 3 main types of mutual funds in India as classified by AMFI. They are as follows:
Growth or Equity Fund;
Income or Debt Funds;
Hybrid or Balance Fund.
Thereafter, based on these 3 categories different sub-categories have been emerged based on their structure, investment objectives, and lastly asset class. Now let’s see what are these.
Types of Mutual Funds in India category wise
⇒Types of Mutual Funds in India by Asset Class
Equity or Growth Funds
Money Market Funds
1.Equity or Growth Funds: This fund primarily invests in stocks or shares of different companies. A fund will be considered as an Equity fund if it has at least 65% of its average net assets invested in equities. This fund allows an investor to invest in equity resulting in high risk and high return situation. This scheme is ideal for long term investment objectives with a view to capital appreciation. Investment in stock directly happens to be very risky but with this growth fund, you have the probability to earn a high return in the long term.
2. Debt Funds: This is a type of fund which predominantly invests in fixed interest-bearing instruments such as government bonds, treasury bills, company debentures, corporate bonds, money market instruments, and fixed income securities or assets. A debt fund invests in the short term or long term bonds. The cost of investment or expense ratio in debt funds is relatively lower than that of the equity funds.
The main objective of this fund is capital protection along with income generation. This fund is ideally suitable for risk-averse investors who want to see their money as safe always.
3. Hybrid Funds: The term hybrid itself suggests that this fund invests both in Stocks and Bonds. Due to its investment patterns, it is called a hybrid fund. Though this investment proportion between the stocks and bonds may vary from time to time as per the situation. This is termed as an ideal mix of investment between bonds and stocks that responds to the market condition as perceived by the fund managers. Also, this fund is called Balanced fund due to its portfolio balancing nature. Ideally, this type of fund is suitable for those who want to take a little amount of risks with a little higher returns over and above debt funds along with capital preservation.
4. Money Market Funds: A Money Market Fund operates with a view to providing easy liquidity, capital protection, and moderate-income generation. This fund invests in the money market ( A market where one can trade money like the stock market) instruments of high liquidity and short maturity like Commercial Paper(C.P), Certificate of Deposits(C.D), Treasury bills issued by the Govt. and Bonds. Since this scheme invests in highly liquid and short maturity instruments they are relatively less risky. Ideally, this fund is suitable for who want to park their surplus fund for moderate returns and in safer bets.
⇒Types of Mutual Funds in India by Structure
1. Open-Ended fund: This is a fund where an investor can purchase or sell units of the mutual fund throughout the year. There is no such constraint on the transaction under this scheme. This simply means an investor can buy the units and exit the fund any time in a business day as per his own convenience. There is no such maturity period and therefore can be continued for a maximum period of 99 years.
Also, this type of fund is actively managed by a fund manager and he decides in which instruments the fund can be invested from time to time. Being open in nature this fund is highly liquid and suitable for investors who want high liquidity.
2. Closed-Ended fund: Unlike the open-ended fund, there is investment constraint in the close-ended fund. This means in this fund an investor can buy units when a New Fund Offer or NFO is made by the AMC. Until the maturity period comes investor cannot sell units of the mutual fund. Thus, investors are allowed to redeem their units only when the specific maturity period comes. During such tenure, no one can buy any further units if he wants to.
Since one can not sell his units during the specific investment period, SEBI has mandated for listing this category of the fund in the stock exchanges so that one can trade if he wants liquidity of his investment.
3. Interval fund: This fund is a mix of both open-ended fund and closed-ended fund. Interval fund allows investors to purchase or sell their units at specific intervals as chosen by the fund house. Other times this fund is closed for making any transactions. Therefore, this fund allows the purchase or sale transactions at the specific intervals as decided by the fund houses as per their choice.
⇒Types of Mutual Funds in India by Investment objective
1. Diversified fund: A fund which makes investments in different securities to reduce risk of the portfolio is called a diversified fund. The fund manager chooses different sectors for investment so that if one particular sector does not perform well, the overall portfolio does not get exposed to extreme risks and one loses all his money. Thus this fund intends to make volatility level of the fund at very low. This fund is suitable for all types of investors which is well equipped with to fight against market volatility. This fund has the ability to make the growth of the fund at a considerable pace due to across sector investment in stock.
A new investor should always choose a diversified fund as his first mutual fund investment. Sector funds are riskier and so should be avoided.
2. Income fund: The Income fund is nothing but a debt oriented mutual fund which gives investors adequate income along with capital protection. Being a debt category of fund, the fund manager invests heavily in fixed income bearing instruments such as commercial papers, certificate of deposits, corporate bonds, debentures, and government securities.
This fund invests 75% to 80% of its money in debt products and the balance in equity. This fund has the track record of delivering higher returns form the Fixed Deposits. This fund is ideally suitable for those investors who want to have income on regular intervals like retired persons. This fund also comes with two options such as Dividend option and Growth option. This fund is one the most popular among the 7top best types of mutual funds in India and is liked by the senior citizens mostly.
3. Liquid fund: This fund invests in short term instruments like money market instruments with maturity up to 91 days such as commercial paper, certificate of deposits, treasury bills and bonds. Liquid fund is used by the investors as an alternative to short term fixed deposits. This fund invests in debt instruments with maturity being less than a year to provide liquidity to the investors.
The liquid fund contains minimal risk and delivers moderate returns and caters the prevailing yield in the market. This fund is ideally suitable for investors with short term investment objectives say 3 to 6 months. NAV of the liquid fund is calculated based on 365 days including holidays, unlike other funds where only business days are considered for NAV calculation.
4. ELSS fund: The Equity Linked Savings Scheme or ELSS is a tax saving mutual fund. This tax saving fund is also one of the most popular schemes of the Best 7 Types of Mutual Funds in India and mostly liked by young investors. Investment in this fund allows an investor to save tax u/s 80 C of the Income Tax Act with maximum investment permissible for tax deduction is 1.50 Lakh only. However, you can invest more than 1.50 Lakh in this fund annually but for tax saving purpose maximum deduction is allowed up to 1.50 Lakh.
The ELSS fund has an inbuilt lock-in period of 3 years. This means each investment has to be remained invested for a minimum period of 36 months. One can not withdraw money from this fund unless your investment completes 36 months. This type of fund has a good track record of delivering high average returns for the last 10 years. Ideally, this fund is suitable for salaried class employees who want capital appreciation along with tax saving benefit.
Final words on types of mutual funds in India
There are also numerous types of mutual funds in India such as Index funds, Sectoral funds, Arbitrage funds, Exchange Traded Funds(ETFs), International equity funds, Fixed maturity funds, and Pension funds. However, these funds are the child funds of the parent funds discussed above.