Mutual Funds are a great tool for individual investors to build wealth for the future. But, before making any investment decisions and building your portfolio, it is important for you to understand your Risk Profile; i.e. your ability and willingness to take on risks, as this will help decide what kind of investments you should make.
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It becomes easier to plan your investments once you understand your risk appetite and define your financial goals, as Mutual Funds offer a wide range of solutions to match the diverse needs of various investors. Before we discuss the various types of Mutual Funds, it’s important to know that Mutual fund schemes may be open-ended or close-ended
- Open-ended schemes are always open for investments.
- Close-ended schemes remain available to investors for investing only during the initial offer period. After this, new investors can only buy the units of these funds from the stock exchange. Also, these funds remain in existence for a fixed period of time after which they are closed and all the money is returned to the investors.
All equity, debt and other funds explained below may either be open-ended funds or close-ended funds.
Equity funds invest in stocks / shares of various companies listed on the stock markets.The performance of these companies over the years and various other market related factors, determine the kind returns that you may earn. These funds generally high risk – high return, and are used to work towards investors long term financial goals, of 3 years and more.
Under the broad category of Equity Funds, there are different kinds of funds, which have different investment strategies. They are:
Diversified equity funds: These schemes invest in shares of companies of any type. Hence, they have a healthy mix of sectors and companies, and give you a wide exposure to the equity market.
Sector funds: These are schemes that invest in a particular sector of the equity market. For example, one fund may invest in technology stocks, one in FMCG while another invests exclusively in the power sector. This would enable you to take a focused exposure to the particular sector of your choice.
Thematic funds: These are schemes which invest in a particular theme;funds that only invest in small cap companiesor companies of specified market capitalization range, funds that aim to find value stocks in the markets, or funds that invest only in the infrastructure and allied industries like construction, power, mining, electricity etc.
Index funds: These schemes try to replicate a specific stock index with an aim of providing returns matching the underlying index. For example, a NIFTY fund would invest in the stocks forming the NIFTY index in the same proportion as the index. The fund manager has to simply copy the index. This type of investing is also called as passive investing.
ETFs: Exchange Traded Funds are similar to index funds but they are listed on the stock exchange. You can buy and sell these funds on the stock exchange.
Tax saving funds: These funds are commonly referred to as Equity Linked Saving Schemes (ELSS). They are diversified equity funds that offer tax benefits under Section 80C of the Indian Income Tax Act, 1961. They provide investors with tax deductions up to a maximum of Rs. 1 lakh invested. These funds have a lock-in period of three years, which means that you cannot sell your units for 3 years from the date of investment.
While Equity Mutual Funds invest in stocks and other equity related securities, Debt Mutual Funds offer a wide range of solutions that invest in interest bearing securities like Government & Corporate Bonds, Term Deposits and Money Market Instruments.Debt Funds are also referred to as Fixed Income Funds, are generally low risk products and typically aim to provide regular income.
The different types of Debt funds are as follows:
Liquid funds: When you have surplus cash and your investment horizon is up to a month, consider investing in Liquid Funds that invest in highly liquid money market securities and other short term debt instruments.
Short to Medium Term Debt Funds: They aim to add stability to your equity portfolio by investing in interest bearing securities like corporate bonds and term deposits and are ideal for investment horizon between 3 months to 2 years.
Income Funds and other dynamically managed Debt Funds: They aim to take advantage fo changing market interest rates and invest in a wide variety of fixed income securities like bonds, debentures (both government and corporate), treasury bills and commercial papers.
Gilt Funds: These funds allow you to invest in securities such as Government Bonds that may not be available to individual investors.
Fixed Maturity Plans and other Close ended Debt Funds: These funds generally have a specified date of maturity and can serve as alternatives to traditional savings instruments.
Balanced Funds: These funds invest partly in debt and partly in equity instruments and aim to provide both growth and regular income.
MIP: Monthly Income Plans (MIP) mainly invest in fixed income securities and also invest a small portion of your money equity markets. They seek to generate income from the debt securities, maximize the benefits of long term growth from equity securities and aim for periodic distribution of dividends.
Other Types of Mutual Funds
Global funds: These funds invest in foreign companies listed in markets across the world. They give you an opportunity to invest in globally renowned companies that may not be available for investment in India to individual investors.
Gold Funds: Gold Funds allow you to invest in gold in a disciplined manner with amounts as small as Rs. 1000, without having to worry about purity, storage, making-charges and safe-keeping.
Fund of Funds: These funds invest in other mutual funds, and are designed to suit the varying needs of different investor categories based on their risk profiles, return expectations and investment goals. It provides investors an opportunity to take advantage of the benefits of diversification by investing in a variety of fund categories.
Different types of investors require different types of investment solutions based on their risk appetite, investment horizon and financial goals. Always remember to Invest Correctly and make your financial dreams come true.
ICICI Prudential Mutual Fund
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This article should not be considered as 'investment advice'. We request the Reader to make informed investment decisions and consult their financial advisors to determine the financial implications with respect to investing in Mutual Funds.