Different Types of Mutual Fund Schemes
Now that we know how does a mutual fund works let us discuss how they can be categorized on various parameters:
Based on Maturity Period
There are two types of mutual funds based on lock-in period – open-ended and closed-ended funds. These have been discussed in detail in chapter 4 of this module.
Based on Investment Objective
Every investor has an investment objective, so does a mutual fund. Based on investment objective, mutual funds can be divided into the following categories:
1. Equity Funds/Growth Funds
As the name suggests, these funds invest a majority of their money into the stock market, intending to achieve long-term capital growth. These funds invest at least 65% of their corpus into equity and equity-related instruments. As most of the investment is made into equities, the risk profile of these funds is higher.
Equity mutual funds, in turn, can be of various types based on where they invest. We have discussed this in detail in chapter 15 of this module.
2. Debt Funds/Income Funds
Debt funds have the majority of their investment (at least 65%) in debt related instruments such as bonds, debentures, government securities and money market instruments. These funds have a lower risk profile than equity mutual funds since debt products are less volatile than equity instruments. However, the returns of these funds are also considerably lower.
These funds are ideal for people who have a lower risk appetite.
3. Hybrid Funds
Hybrid funds invest in both equity and debt instruments and aim to seek a balance between risk and return. They generally invest around 60% in equities and 40% in debt instruments. They usually generate more returns than debt funds but have a lower risk profile than equity funds as well.
These funds are ideal for investors who want to participate in the equity market but do not want to take a lot of risk on their investment.
We have discussed these three kinds of funds in more detail in module 3 of this course.
4. Gilt Funds
Gilt funds invest only in government securities. These funds carry almost no default risk since the issuer of the securities is the government and hence the chances of default are almost none. However, these funds are subject to interest rate risk as the interest rate moves up or down with time.
Apart from the funds discussed above, there are a few other kinds worth mentioning:
5. Equity Linked Savings Schemes (ELSS)
These mutual funds provide tax deductions under Section 80C of the Income Tax Act, 1961. These funds have a mandatory lock-in period of 3-years. However, a purchase can be made anytime. These funds primarily invest in equities with the objective of providing capital appreciation over time.
6. Sector-Specific Funds
These funds concentrate on a particular sector and aim to benefit from its growth. It can be any sector such as pharmaceuticals, infrastructure, IT, etc. Investment is made in multiple companies of the same sector. These funds have a higher risk profile since their return is directly related to the performance of that particular sector.
7. Index Funds
These funds follow a specific index such as the S&P CNX NIFTY or the BSE SENSEX. The fund’s portfolio replicates the portfolio of the index, with similar weights. Thus, the returns of these funds are more or less similar to that of the index.