There are different types of mutual funds available for investors through which investor can make profit. But how to choose right one? What are the best funds? It all depends upon the horizon, risk appetite, Objective and other factors.
Here are the different categories of Mutual funds where the fund manager pools the money from investors and invest on behalf in multiple assets like stocks and bonds.
Mutual funds Based on Fund Scheme
There are two types of M.F. based on the constitution of the fund. This affects the investors who can buy the fund units and sell them.
Close Ended Schemes
These schemes have fixed maturity periods. The investors can buy these funds during the open period in the initial issue. Once the window closes, Such Schemes cannot issue new units except in case of bonus or rights issues. After that investor can buy or sell already issued units of the scheme on the stock exchanges where they are listed. The price of the units may vary from the NAV of the schemes due to demand and supply factors, Investors expectations and other market factors.
Open- Ended Schemes
These funds do not have any fixed maturity period. Investors can buy or sell units at NAV related prices from and to the Mutual fund on any business day. The fund can issue units whenever it wants. These schemes have unlimited capitalization which do not have fixed maturity date to cap on the amount that once can buy from the fund.
These funds are not listed on any of the exchange. Open- ended schemes are preferred for their liquidity. Such funds can issue and redeem units during the life of the scheme. The unit capital of the open- ended funds can fluctuate on daily basis.
Advantages of Different Types of Mutual funds (Open & Close ended)
- In this the Investors can exit anytime they want to. The issuing company directly takes the responsibility of providing entry and exit. This option provides ready liquidity to the investors and avoids reliance on transfer deeds.
- Investors can take the entry anytime they want. Open ended funds allow them to enter the fund at anytime and to invest at regular intervals.
Mutual funds based on Assets Invested In
There are three different types of M.F. based on the assets invested in. Here are they
The funds that invest only in stock are known as equity funds. They are high risk, high return funds. Most of the growth funds are the ones that promise high returns over long term. Such funds have less tax liability in the long run when compared to debt funds. Equity funds are further classified into different types based on the investment objective like index funds, sector funds, tax saving schemes and so on. Let see these in detail.
The funds which invest in equity as well debt are hybrid funds. For this reason, they are less risky then equity funds but more than debt funds. They are often known as balanced funds because they give higher returns then debt funds but lower then equity funds.
These funds invest in debt instruments like bonds, government securities, debentures and so on. These are debt instruments because they are borrowing mechanism for companies, bank and government.
Types of Mutual funds
Mutual funds based on Investment objective
Every investor has a different objective for investing in the financial avenues. Some invest to create wealth, while some for secondary source of income. There are various investors who invest keeping both the objective in mind. So for such investor requirement here are three different types of M.F. based on the objective of investment.
These schemes give capital return in the long term. Such scheme usually invests in equities. These schemes are usually high risk schemes. This is due to the reason that value of assets are subject to fluctuations. Also the growth funds pay lower dividends.
These schemes try to bring balance between risk and return. They do by investing in equities and debt instruments. They are kind of hybrid fund. Their risk is lower as compared to equity and growth funds as compared to debt and fixed income funds.
These are funds which invest in specific kind of assets. They may be equity of debt fund.
Indices are formed to monitor the performance of the companies in any specific sector. It serves as benchmark to measure the performance of the market as whole. Indices serve as benchmark to measure the performance of the market.
they are kind of different equity scheme which restrict their investing to one or predefined sectors e.g. real-estate sector. These schemes are more risky than general schemes.
Tax Saving Schemes
Investors are encouraged to invest in equity markets through ELSS schemes. When you invest in such schemes the taxable income falls.
Blog By, Trading Fuel