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TYPES OF MUTUAL FUNDS AVAILABLE IN INDIA

Mutual funds have gained a lot of popularity in recent times for being an effective investment avenue. There are several types of mutual funds in India that you can choose from based on your risk appetite, investment goals, and investment needs. Asset management companies in the country offer a plethora of choices in mutual funds. However, there are broadly 4 types of mutual funds categories that these funds can be divided into. These categories can be used to divide the available mutual funds based on their structure, asset class, investment objective, and portfolio management.

The 4 Types of Mutual Funds Classifications

1.Based on the Structure of the Scheme

Based on their structure, types of mutual funds can be classified as open-ended, close-ended, or interval schemes. This classification depends on the maturity period of the mutual fund in question:

  • Open-ended mutual funds: These are types of mutual funds in India in which you can make an investment or redeem your investments whenever you want. Open-ended mutual funds are considered to be more liquid in nature as there is no tenure for maturity or a specific time period involved in the investment. Most types of mutual funds in India are open-ended. However, some solution-oriented schemes and ELSS schemes are exemptions, as they involve a lock-in period (maybe of up to 5 years) during which redemption is not allowed.
  • Close-ended mutual funds: These are types of mutual funds that involve a stipulated period of time for investment and have a specified maturity period. Such schemes are open for investment at the time they are launched. Investments in these types of mutual funds can only be made during the NFO period. You are not allowed to redeem the scheme until it reaches a fixed maturity date. Some close-ended schemes are listed on the stock exchange, even after the NFO, where investors can buy or sell these funds. Sometimes, the mutual fund company repurchases units periodically, where investors are offered an option to sell their units back to the mutual fund house.
  • Interval mutual funds: As the name suggests, these are different types of mutual funds that allow you to invest and redeem from certain schemes at various time intervals. Essentially these schemes come under close-ended mutual funds and its types, also offering windows in between that allow you to enter or exit the fund.

 

2.Based on the Asset Class of the Scheme

When it comes to classifying mutual funds and its types, this is the category that encompasses numerous types of mutual funds. Depending on the investment objective, there can be different types of mutual funds, including:

  • Equity mutual funds: These types of mutual funds involve investing at least 65% of the portfolio in equity-related stocks and securities. With high market risk, these funds also offer the potential for high returns. Equity mutual funds can further be divided into large, small, medium cap funds, dividend yield funds, focused funds, ELSS, and many more.
  • Debt mutual funds: These involve investments primarily made in fixed income instruments (avenues that offer fixed interest rates). These types of mutual funds are immune to stock market risks and offer returns that are relatively stable as compared to equity mutual funds and its types. Different types of debt mutual funds include overnight funds, liquid funds, low duration funds, etc.
  • Hybrid mutual funds: Hybrid mutual funds have an investment portfolio that includes a mix of different asset classes, like debt and equity. With hybrid funds, you get diversified exposure to different asset classes. These types of mutual funds are further divided into conservative (primarily debt-based), balanced hybrid (40-60% equity-based, and 60-40% debt-based), dynamic asset allocation (debt-based and equity-based allocation are dynamic), multi-asset allocation (involving at least 3 different asset classes), etc.
  • Solution-oriented mutual funds: These types of mutual funds in India are invested in to create funds to meet specific financial needs. These can be divided into two different types of mutual funds – retirement funds and children’s funds.

 

3.Based on Your Investment Objectives

When you classify mutual funds and its types based on the investment objectives they help fulfil, you get two types, namely growth and dividend options in mutual funds:

  • Growth Option: On choosing the growth option in different types of mutual funds, the profits that you make from the scheme will be invested back into the scheme for which the price of each mutual fund unit goes up or the net asset value goes up. Similarly, if there is a loss, the NAV will go down. So, if you want to get any profit from the growth option of any types of mutual funds, you will need to redeem the units.
  • Dividend Option: In the dividend option, the profits generated by the mutual funds scheme are distributed to investors at regular intervals. This can be monthly, quarterly, or annually. The profit is deducted from the net asset value.

 

4.Based on Portfolio Management

Of the 4 types of mutual funds classification, the final category is based on how you wish to manage your investment portfolio. This category can further be divided into two types of mutual funds in India. These include active and passive mutual fund schemes.

  • Active Mutual Funds: These are actively managed mutual funds wherein the fund manager continuously keeps on a lookout for different types of mutual funds that can help them generate better results. Stocks are sold and bought whenever a good opportunity is seen.
  • Passive Mutual Funds: In these types of mutual funds in India, the portfolio is not actively managed and reflects a specific index. The money is allocated exactly as shown in the index. If there is a change in the index composition, that is the only time when the portfolio too undergoes a change.

 

Given the wide variety of choices when it comes to mutual funds and its types, it is not hard to see why mutual funds have been gaining so much popularity in recent times. In the abovementioned 4 types of mutual funds classifications, people can choose from different types of mutual funds in India based on their investment goals, the amount of risk they are comfortable with, and so on. A great way to go about mutual fund investments is to ensure that you create a diversified portfolio that diversifies your risks and maximises your portfolio’s potential for generating returns. Assess your financial goals before you choose the right scheme for mutual fund investments for the best results.

 

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