Investing in mutual funds represents a strategic approach to wealth management, offering a spectrum of opportunities characterized by diversity and flexibility. In the Indian financial market, there exist over 45 registered mutual funds, each presenting a unique array of schemes tailored to accommodate the diverse needs of investors. Below, we delve into the intricacies of mutual funds, categorizing them for clarity and incorporating relevant examples to enhance understanding.
Here are the types of mutual funds in India based on various categories.
1. Structure of Mutual Funds
Open-ended funds
Exemplifying perpetual accessibility, open-ended funds permit investors to buy or sell units at their discretion throughout the year, with transactions occurring at the prevailing net asset value. This structure is particularly appealing to those who prioritize liquidity. An example of an open-ended fund is the HDFC Equity Fund.
Close-ended funds
Contrarily, close-ended funds operate within predetermined timelines, allowing purchases solely during specific periods. Redemption is tied to the maturity date, and to introduce liquidity, these funds are traded on stock exchanges. The SBI Debt Hybrid Fund is an illustration of a close-ended fund.
Interval funds
Striking a balance between open and close-ended funds, interval mutual funds enable transactions at designated intervals, affording investors the option to buy or sell units during these specified periods.
2. Mutual Fund Asset Class
Equity funds
Investing in company shares, equity funds are directly influenced by market performance, offering the potential for high returns accompanied by heightened risk. Categories such as Large-Cap Funds, represented by the ICICI Prudential Bluechip Fund, showcase the diversification within this asset class.
Debt funds
Functioning as stable anchors, debt funds channel investments into fixed-income securities, providing stability and regular income with comparatively lower risk. An example is the Aditya Birla Sun Life Corporate Bond Fund.
Hybrid funds
Balancing risk and stability, hybrid funds allocate investments across both debt and equity instruments. The HDFC Hybrid Equity Fund is an illustration of a fund within this category.
Solution-oriented funds
Structured to align with specific financial goals such as education or retirement planning, solution-oriented funds come with a mandatory lock-in period. The UTI Children's Career Fund-Investment Plan is an example catering to the goal of building funds for children's education.
Other funds
Index funds, mirroring specific stock indices, and fund of funds fall under this category, with the ICICI Prudential Nifty Next 50 Index Fund being an instance of an index fund.
3. Mutual Funds Based on Investment Goals
Growth funds
For those seeking capital appreciation, growth funds focus on high-performing stocks over the long term. An example is the Axis Long Term Equity Fund.
Tax-saving Funds (ELSS)
Combining investment with tax benefits, Equity-linked Saving Schemes (ELSS) like the Reliance Tax Saver Fund offer deductions under Section 80C, with a minimum investment horizon of three years.
Liquidity-based funds
Categorized by liquidity considerations, funds like the HDFC Liquid Fund cater to short-term goals, while retirement funds typically have longer lock-in periods.
Capital protection funds
Aiming to minimize losses, capital protection funds invest in both fixed-income instruments and equities. The Kotak Capital Protection Oriented Scheme is an example within this category.
Fixed-maturity funds (FMF)
Aligning with specific maturity periods, fixed-maturity funds invest in debt market instruments. For instance, the IDFC Fixed Maturity Plan.
Pension Funds
Designed to provide regular returns over an extended investment period, pension funds, such as the UTI Retirement Benefit Pension Fund, often embody a hybrid structure.
4. Risk Appetite
Investors can tailor their mutual fund choices based on individual risk tolerance. Very-low-risk and low-risk funds, such as liquid or ultra-short-term funds, offer short-term solutions with modest returns. Medium-risk funds, including hybrid funds, strike a balance between risk and reward, while high-risk funds, with substantial equity exposure, have the potential for higher returns. The risk-o-meter, a standard disclosure tool, aids investors in aligning their choices with their risk capacity.
Comprehending the intricacies of diverse mutual fund categories empowers investors to align their investments with specific financial objectives. Utilizing tools like the SIP calculator facilitates prudent decision-making, ensuring optimal utilization of financial resources in the realm of mutual funds.
Happy Investing!
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