In last article we seen what is a mutual fund and learned some of its technical jargon that haunt us all the time, now we are going to look into different types of mutual fund options we have to begin our investment with.
But before we move on to types here is a quick recap…
A mutual fund is an investment scheme that pools money from many small-small investors and invests it in a variety of securities such as stocks, bonds, and other asset classes. Since you are always investing in all sectors and segments in fractions it is not going to break your pocket and you can start investing with small amount every month using systematic investing plan (SIP) or in one go (lump sum). Mutual funds are managed by professional fund managers who make instant decisions about which securities to buy and sell in order to achieve the fund’s investment objectives. Investing in a mutual fund allows investors to diversify their portfolios and access a wide range of investments with one purchase.
Why mutual funds? Why not invest in stocks directly?
Just after we understand how mutual fund works, it is very common to think, why not invest directly in stocks and other securities that will be more effective and I’ll have complete control on it.
Technically, anyone can do that, and everyone should invest in stocks directly as it will teach us important life lesson with experience that no one teaches. But everyone should continue doing their investments in mutual funds because it is really tough job to take instant decisions on market movements.
In order to buy and sell stocks directly we’ll require a Demat account and time to do trade. On top of that, we’ll need to put a lot of market analysis and stock research before investing in. Similarly you should learn about taxes that you need to pay when you have short term or long term capital gains.
Financial literacy is more important here because all day we to do financial activities.
Doesn’t it sound like a full fledged job, right? Yes. That’s why I wrote it is possible but not feasible for everyone. Unless you know and time track the market well. That’s why, it is difficult to make profit in the stock market.
So, this is the main reason why mutual fund is right for most of us. Further we need to learn about picking the right mutual fund scheme that will make you a fortune. But before that learn types of mutual fund.
Types of mutual fund.
There are many types of mutual fund and that’s why I have a tree here to explain well.
1. Mutual funds by asset classes.
In this type mutual fund invests in any one or different asset classes like equity, bonds, and golds.
1.1. Equity mutual funds. (high risk – high return)
Equity mutual funds are a great way to invest in the stock market without having to manage your own portfolio. They provide you investors with access to a diversified portfolio of stocks that are managed by fund managers. With equity mutual funds, you can benefit from the expertise of experienced fund managers who have the knowledge and resources to make informed decisions about which stocks to buy, sell, or hold for long term based on the risk factors. Investing in equity mutual funds can help you achieve your financial goals with highest risk. While the primary focus of equity mutual funds is on stock market investments, it’s also essential for any investor to understand the ownership dynamics of their investments.
This is where something like a cap table software comes into play. This software helps track the equity ownership of a company, providing a clear picture of who owns what, how much each investor stands to gain in a potential exit scenario, and how further investments could dilute existing shareholders.
1.2. Debt mutual funds. (low risk – low return)
Debt mutual funds are totally off the stock market, it is more like a fixed return giving scheme with lesser risk compared to the equity market. But returns are limited no matter how the market is doing. This is the main reason only few people show interest in this scheme. But it is safe scheme for moderate risk takers.
Fund managers usually buy corporate and government bonds or debentures to allocate some fund for market falls so they can invest money in equity and gain more numbers of units in discount.
1.3. Hybrid mutual funds. (mid risk – mid-high return)
Hybrid mutual funds are a combination of equity and debt funds. Fund manager switches funds between both markets from time to time in order to give better returns. It may give less or more returns compared to equity but returns would be slightly stable and impressive in longer run. Mid aged investors should go with it.
1.4. Solution oriented mutual funds.
Solution oriented mutual fund schemes are for specific goals like building funds for children’s education or marriage, or for your own retirement. People invest in such kind of schemes to beat the inflation of their existing money they have and of course to earn more. Such schemes come with a lock-in period of at least five years.
1.5. Index mutual funds (Passive mutual funds). (technically no risk)
Index mutual funds are the scheme where the fund manager follows the exchange’s index like NIFTY 50, SENSEX, etc. Since the fund manager has to follow and replicate the index and doesn’t have to do any analysis about the fund we call it passive mutual funds also. If you want to take less risk in the equity market than index funds are the safest scheme to begin with. Make sure you pick the one that has the lowest tracking error.
For example, NIFTY 50 and SENSEX have given 12-15% annually if we compare any 5 years time.
1.6 Gold/Silver/ETFs (Exchange Traded Funds)
There are new fund scheme recently gained a lot of traction which is “Gold” funds, It is like buying smaller units of gold to diversify a bit in precious metals. Similarly there are “Silver” funds too. Or you can invest in ETFs that holds Gold and Silver investment for you. ETF is like mutual fund stock that can be traded in stock market.
2. Mutual funds based on investment goals.
Now there are certain mutual fund schemes that serve you some investment goals.
2.1. ELSS (Equity Linked Saving Scheme) tax saver funds. (risky but returns are good)
Just like a normal equity mutual fund everything is same in this ELSS tax saver fund, but with a minimum 3 years of lock in period. Amount invested today would not be withdrawable for at least 3 years. Keep in mind that anything invested today cannot be withdrawn for 3 years.
You will get tax deduction benefit of up to ₹1,50,000/- under 80C of income tax. This is the reason why most employees with high income slabs opt for this kind of investment scheme.
2.2. Retirement mutual funds. (considering duration risk is less)
As the name itself defines, such mutual fund schemes are meant for retirement. Fund manager invest in companies that runs the economy as they give way better returns in long term.
So these are some of common types of mutual fund schemes.