Ever came across different names of mutual fund schemes but did not have a faint idea what distinguishes them from one another? Here’s a guide for you to understand different types of mutual funds!
Types of mutual funds:
- Equity Funds
These funds, primarily, invest in equity stocks. They invest the money collected from different investors into shares of different companies. The performance of these shares is dependent on the market trend. These are high risk, high return kind of fund.
- Debt Funds
They invest in fixed-income securities such as bonds, securities, treasury bills, etc. They have pre-determined maturity date and interest rates. They ensure fixed income with low risk potential.
- Money Market Funds
They are for the investors who trade money in the money market. Usually, the financial instruments of money market include securities like bonds, T-bills, etc. They are preferable for short term investment with low risk.
- Hybrid Funds
They are also known by the name Balanced Funds. They are a mix of bonds and stocks, thereby, bridging the gap between Debt Funds and Equity Funds. There is no fixed ratio. It may be variable or fixed. They are preferable for investors who expect regular income with high risk potential.
- Liquid Funds
They also belong to the debt-fund category as they invest in debt instruments with a tenure up to 91 days. The maximum amount you can invest is Rs. 10 Lakhs. The difference between liquid funds and debt funds is the calculation of the Net Asset Value (NAV). NAV of liquid funds is calculated considering all the 365 days including Sundays but others are calculated considering business days only.
- Tax-Saving Funds
Equity Linked Saving Scheme (ELSS) serves dual benefits they help to save on taxes in the lowest lock-in period of 3 years. They make you earn non-taxed returns. They are best suited for long-term investments by salaried investors.
- Fixed-Maturity Funds
To lessen the tax burden, fixed maturity funds provide a great opportunity. They have a fixed maturity period which could range from 1 month to 5 years. The fund manager puts the investment for the same time period to receive accrual interest at the time of maturity.
- Sector Funds
These are theme-based mutual funds and they invest in one specific sector. The risk potential is high as the whole fund is invested in just one sector. The sector-trends must be considered while investing in such funds and if decline starts then you should exit immediately. They offer great returns against high risk.
