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Understand Mutual Fund Categories Before Investing

Many investors are unsure what mutual funds are and how they work, which is why it is a great idea to understand mutual fund categories before investing. The most important thing you should know when you understand mutual fund categories is that the asset class itself is split into several categories. For example, there are equity funds, debt funds, and so on. Some investors may not be sure how to categorize their portfolio, but with a little bit of research, you will get a better idea.

Hopefully, this short article has given you some food for thought as you begin to understand the different ways to categorize your portfolio. Here are different types of mutual funds in India on the basis of various attributes:

BASED ON ASSET CLASSES 

Equity Funds

It is an equity-oriented fund that invests in various stocks, also known as equity securities. Equity mutual funds can also be compared with money funds and bond funds. In general, equity mutual funds or most of the SIP plans are usually concentrated in stock, with a small portion of cash, and this is usually very small, in contrast to actively managed bonds, securities, and notes. Money funds are usually in different categories – bond funds, stock funds, and other funds.

Debt Funds

Debt mutual funds are basically funds that hold debt securities, i.e., bonds, mortgages, notes, etc. Equity mutual funds invest mainly in stocks of publicly traded companies and various related securities such as derivatives (i.e., options) that trade on the stock exchange.

Money Market Funds

It is a specific type of mutual fund that invests in short-term debt securities. Money market funds are designed to provide investors with a highly secure source of income by shielding them from the risk inherent in short-term debt investments. Money market mutual funds are typically managed by a fund manager who utilizes a variety of strategies to ensure the long-term viability of the fund.

Hybrid Funds

Hybrid funds are simply a mix of different types of mutual funds in India. They can consist of both stocks and bonds or just stocks. These funds often have the ability to offset certain losses through the use of another asset class that offers a higher return.

BASED ON STRUCTURE

Open-Ended Funds

Open-ended funds are an emerging concept in financial investing that seeks to emphasize both the benefits of diversification (theory of keeping money from cluttering your investing portfolio) and the ability to create opportunities out of thin corners. The open-ended fund’s concept is a mix of several types of mutual funds – unit trusts, stocks, and bonds, among others.

Close-Ended Funds

A close-ended fund is an unorganized group investment strategy, where most of the capital assets are owned by a single investor who may, for example, pool funds together to purchase a range of financial instruments like bonds, stocks and invest them all in different markets.

BASED ON INVESTMENT GOALS

Growth Funds

A growth fund contains companies primed for quick revenue growth faster than that of the market or other sector peers. Growth funds are further separated into large and mid-cap growth funds. Large-cap growth funds tend to be more actively managed by professional asset managers, whereas mid-cap growth funds can boast the skill of aggressive short-term trading.

Liquid Funds

Liquid funds are funds where assets are invested predominantly in short-term financial instruments such as treasury notes, commercial paper, government securities, and certificates of deposits. In other words, they are the type of investment where investors can park their money for brief periods, for a period of one to three months, allowing investors to evade short-term dangers.

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