I] Types of Mutual Funds Based on Structure
1. Open Ended Mutual Funds
Open Ended Mutual Funds are available for sale or purchase throughout the year. Investors can invest as per their convenience. There is no limit on the amount of investment.These funds are highly liquid, it means, investors can sell off their investment at any time.
2. Close Ended Mutual Funds
In close ended mutual funds, investors can purchase units only during the initial offer period. These units can then be redeemed after the completion of a specified maturity period. Close ended mutual funds are usually listed on the stock exchange.The crucial difference between open ended and close ended mutual fund is that the close ended funds can’t be sold back to the mutual fund house. They are sold back to the stock market at the prevailing rates for the share.
3. Interval Funds
Interval Funds fills the gap between open ended and close ended mutual funds. They are available as an initial offering and are then opened for the repurchase of shares by the fund management company at different intervals during the tenure of the fund.
II] Classification of Mutual Funds on the Basis of Asset Class
1. Equity Mutual Fund
These funds invest money in the equity shares of a company. Hence, they are also known as Stock Mutual Funds. They are considered as high-risk investments. compensate for it with attractive returns.
2. Debt Mutual Fund
Debt Mutual Funds invest in fixed income securities such as treasury bills, bonds and debt instruments such as Fixed Maturity Plans, Liquid Funds, Monthly Income Plans, Gilt Fund, Long Term Bonds etc. All the fixed income securities offer a fixed rate of interest and are bound by a predetermined maturity date. These investments are considered to be safe.
3. Money Market Mutual Funds
These funds invest in liquid assets. They possess high degree of liquidity, thus, they are also known as the cash market or capital market. They invest in Government or financial institutions bonds, dated securities, and certificates of deposits, T-bills, etc.
4. Balanced Funds
They are also known as hybrid funds. These funds are a mix of assets like bonds and stocks.Normally, these funds invest in equities and debt in the 40:60 proportion.
III] Classification Based on Investment Objectives
1. Growth Mutual Funds
Growth mutual funds invest the money mainly in growth sector equity. They are not considered suitable for long-term investments because of their high risk factor.
2. Income Mutual Funds
These funds distribute the money in a assets such as debentures, bonds, securities and certificates of deposits. Such an investment is perfect for conservative investors who want to invest their money for minimum 2 to 3 years.
3. Liquid Mutual Fund
Here, money is primarily invested in short term and ultra short term instruments like commercial papers, bank certificate of deposits, treasury bills etc. These funds are ideal for short term investments.
4. Tax saving mutual fund
Equity Linked saving scheme (ELSS) are funds that invest the money in equity. The money invested in these schemes is eligible for deductions u/s 80C of the Income Tax Act,subject to maximum limit of ₹ 1,50,000 per annum. Even if they are high on risk, they offer a generous return.
5. Pension Funds
Pension funds divide the investment between equity and debt instruments so that the equity component offers higher returns while the debt component provide low but steady returns thereby balance the entire outcome.
IV] Mutual Funds Types Based on Specialty
1. Index Mutual Funds
Index Mutual Funds also known as Exchange Traded Funds (ETFs). The expense ratio associated with it is low. The key difference between ETFs and Index Funds is that ETFs can be traded on the stock market, while Index Funds cannot.
2. Fund of Funds
Fund of Funds (FoF) invests in other mutual funds (which could be Domestic or International). With diversity of funds that can adjust the portfolio and balances the risk. These funds are also known as Multi-Manager Funds.
3. Sector Mutual Funds
Sector Mutual Funds invest in stocks of companies of a specific sector of the industry. The returns of this investment are based on the overall performance of that specific sector. Similarly, the risks associated with these investments also depend on the nature of the sector.
4. Commodity Mutual Funds
Commodity mutual funds invest in companies that are functioning in the commodity market. The returns of these funds depend on the performance of the commodity. Such investments can possess high risk.
5. Asset Allocation Funds
Asset Allocation Mutual Funds invest in debt, equity and gold in an optimum ratio. These funds are highly flexible. The ratio of investment could depend on the prevailing market trends.
The investor should pick mutual fund as per their plans. It could be tax saving. It could be saving for long term for better future or any other goal. Before taking any decision, check out all the documents as well as terms and conditions to save yourself from any pitfalls. Based on your risk capacity and investment goal, choose fund wisely.