In my previous articles, I had discussed about the basics of mutual funds and the precautions you should exercise while investing in mutual funds. In this article, I would explain to you about the various types of mutual funds that are available in the markets today. Before proceeding, I would like to clarify that the types mentioned are not exhaustive or definitive by any means. There are various means of classifying the types of mutual funds. In fact, the purists would explain that there are indeed only three categories – equity based, debt based and money market funds. Yet, even a cursory look at the pink papers would convince you that there must be dozens of categories. In fact, most of the types would be a mix or hybrid of the basic types.
It is necessary to understand the various categories of mutual funds, since such a knowledge would assist you to make an appropriate choice while making investments.
The following are the basic types of mutual funds, classified on various criteria:
According to Maturity
Open Ended Funds- Open ended funds have two main characteristics. First, they are purchased from the asset management company (AMC) itself, and not from the secondary market. Secondly, they have no fixed maturity period.
Closed Ended Funds- Closed Ended funds are issued in a fixed number of shares(or units) in an initial public offering. In addition, they have a specified maturity period, mostly between three to fifteen years. You could subscribe to the shares during the period of the IPO, but if you want to purchase them afterwards, you would have to go to the secondary market.
Acording to Investment Objectives
Growth Oriented Funds- These funds aim to increase the amount of funds invested, i.e., the main aim is capital apreciation. They invest in the equity stocks of fast growing companies. The risk level associated with these funds is the highest.
Income Funds – These funds aim to provide a regular stream of income to the holder. They invest in a mix of dividend paying stocks, preferential shares, debentures, bonds and money market instruments.
Balanced Fund - A balanced fund is usually the mixture or hybrid of the growth and income fund. They seek to provide the best of both the worlds, that is, capital apreciation with a regular income.
Liquid Funds – Liquid funds aim to provide you with liquidity, at the same time ensuring that you get a higher return on your funds than the ordinary savings account. These funds funds invest in short-term debt instruments, which can be redily redeemed within a peirod of 24 hours.
There is a wide range of funds that are oriented towards a particular market or instrument or an objective. These funds can be termed specilaized funds.A few examples are as follows:
Index Funds – An index funds pegs itself to a aprticular share index, e.g., the BSE or the Nifty. It invests its portfolio in the constituent stocks of the index in exactly the same proportions. It seeks to replicate the returns of the index.
Tax Saving Funds – A tax saving fund (or an Equity Linked Savings Scheme, or ELSS) is especially focused on saving taxes under the releveant tax laws. Thus, you get double benefits, tax savings, as well as returns on your investments.
Gilts Funds – As the name indicates, gilt funds invest in gilts, or selcted government securities. Therefore, they assure a very high degree of security, although the returns are on the lower side.
Sector Specific Funds – These mutual funds schemes invest in specific sectors or segments of the economy. For example, a real estate fund or an infrastructure fund.
Country/Market Specific Funds - Do you want to invest in the US economy? It may be diffiult otherwise, but a US oriented fund may provide the answer. Or perhaps you may like to invest in the emerging economies of the world? Well, then try the emerging markets funds!
As I pointed out at the very outset, this list is neither exhaustive, nor definitive. It purpose is to serve you as a broad guide in the maze of the financial world. Mutual funds would keep on eveolving, and before you know it, there would be a new type introduced in the market. Yet, it is good to understand the basic types, so you may be better able to make the decision to invest your hard earned money in proper and safe manner.