What are various types of mutual funds in India?
In last 2 months there were several questions from readers saying they are new to mutual funds and they invest in such schemes. However, they are not aware what are different types of mutual funds available in India to invest. If you are a new investor in mutual funds and want to know the available types of mutual funds, this article is for you. If you are already investing, you would know which mutual funds suits you better.
Also Read: 10 Best Mutual funds where I am investing?
What are mutual funds?
Mutual fund schemes pool money from investors and invest in various stocks, securities and bonds depending on the investment objectives of the schemes. The entity which does this is called Mutual fund House. There are various mutual fund houses like HDFC Mutual fund, ICICI Mutual fund, Birla Mutual funds, Tata Mutual funds, Quantum mutual fund etc. These mutual fund houses float various mutual fund schemes. However, each scheme would have its own investment objective. Hence it is important for you to understand the various types of mutual funds in India and who should invest in such schemes.
a) Types of mutual funds based on maturity
There are two kinds of mutual funds which an investor can invest based on maturity.
i) Open ended Schemes: These are mutual fund schemes which are open for subscription at any time during the year. Means you can purchase them on a daily basis based on their Net Asset Value (NAV) which is determined by mutual fund houses. There is no maturity date for such mutual fund schemes. These would continue to invest in the stock market, securities, etc. based on investment objectives. An investor can exit any time from such schemes by redeeming the mutual fund units. Based on NAV and exit terms, the redemption amount is paid to the investor.
ii) Close ended schemes: Close ended schemes are those where the maturity date is fixed. Generally there are two types of mutual funds in close end schemes.
- Fixed Maturity Plans: These are mutual fund schemes where the maturity date is fixed and they cannot be redeemed during the period. However, as an alternate route, one can find a buyer in stock exchange and sell those units to them.
- Capital protection plans: As the name suggests, these mutual fund schemes aim to do capital protection. Means their objective is capital protection and not taking much risk. Generally the returns are low in such MF schemes.
b) Types of mutual funds based on investment goals
There are investors whose investment goals are different. Some think they need regular income, but something that they want to grow their money over a period of time.
- Growth option in mutual funds: Mutual fund schemes that aim to provide growth for the investment in the long term are growth mutual funds. If you are young and started earning in your career, this is the best way to invest. Here, such mutual fund schemes keep earning returns, however, they would be paid only during redemption or at maturity. If you want to invest money for 10 or 15 years, growth mutual funds can grow your money like anything. Do you know that Rs 1,000 per month SIP can make you Crorepathi in 15 years if you go thru growth option in mutual funds?
- Dividend option in mutual funds: These schemes aim to provide income by way of dividends. Since dividends received from mutual funds are not taxable, this can be treated as one of the best ways to have tax free income. This is suitable for those who want to enjoy returns every year instead of enjoying at maturity.
c) Types of mutual funds based on investment objectives
Now, I am coming to the main point. Though above gives a theme for you, below are real and various kinds of mutual funds where you need to think and invest. All these funds would have growth and dividend options. Also close ended mutual funds would be under Debt mutual funds segment which are indicated below.
1) Index Mutual funds: As the name indicates, mutual fund schemes that invests in Index (Sensex, Nifty, Banking Nifty, etc.) and would perform in line with the index are index mutual funds. However, MF houses would not be researching any particular stock here. They blindly invest in Index stocks. Hence returns are limited.
Who can invest: If you believe that markets are expected to go new highs in the coming years, this is one of the options to invest in mutual funds. This is for high risk appetite individuals. In the last 4 out of 5 years, the SENSEX has not raised much. SENSEX raised only in the last 1 year. Similarly, investors enjoyed returns only this year. Hence, one should consider such facts before investing in such funds.
2) Equity mutual funds: This is one of my favorite mutual funds. Equity mutual fund schemes invests more than 65% of its portfolio in equity related stocks and instruments and balance in debt securities and bonds. Such schemes would research and invest in a variety of stocks depending on investment objectives. There could be large cap funds, mid-cap/small-cap funds, sector based funds etc.
Who can invest: If you are young investor or married and have kids and looking to invest for a period of 10 to 15 years, these are the best schemes to invest. These are high risk to medium risk mutual funds. Annualised returns are expected between 12% to 18%, depending on the period and schemes chosen by you. You don’t need any separate investment plan for your kid either for education or for their marriage. If you invest in best mutual funds, you would be the winner.
3) Balanced mutual funds: These are a kind of mutual fund schemes where it invests up to 65% in equity and remaining in debt securities. The advantage with these schemes is they can reduce stock exposure quickly and invest the majority in debt securities depending on market conditions. These are some what medium risk mutual funds.
Who can invest: Investors with a medium risk appetite, but expecting to get good annualized returns of 10% to 15% in long run of 8 to 10 years can invest in such schemes. Investors can also invest in the medium term of 3 to 5 years. Some of the top funds in this category are HDFC Prudence Fund, ICICI Balanced Fund and HDFC Balanced fund.
4) ELSS Mutual funds: If you are looking for tax saving in mutual funds, along with good returns, you should opt for ELSS (Equity linked Saving Schemes) Mutual funds.
Who can invest: ELSS funds provide higher returns along with tax savings u/c 80C up to a maximum of Rs 1 Lakh. Lock-in period for such funds are 3 years. All other tax saving options have 5+ years of lock-in period. Hence this is the best way to invest for tax saving purpose. These are for medium risk appetite investors.
5) Debt funds: All the funds indicated above carry some risk as they invest in stock markets based on their investment objective. However, if you are looking for low risk mutual funds, but want returns better than Bank FD, you can consider debt funds. Debt funds invests in debt related securities like commercial papers, Govt. Securities, bonds, etc.
Who can invest: These funds are for low risk appetite investor. You can invest for 2 to 5 year time frame to get benefit out of these funds. The annualized returns would be between 8% to 11% which are better than bank FD Schemes.
6) Liquid funds: I had some surplus funds where I got variable pay from my company. However, I want to utilize such funds for any purpose in the short term of 3 to 6 months. If I deposit in a bank FD scheme, it would give only 2% return (For short term, 6% interest rate would give me 2% for 4 months). However, I have chosen liquid funds for parking short term money. I got returns of 3% in the short term of 4 month period.
Who can invest: If you have surplus money and want to invest for short term of 1 month to 6 month period, but do not know when you need it, this is the best place to invest. You can expect good returns from this compared to bank FD schemes. Alternatively, you can choose ultra short term mutual funds which have similar objectives.
Quicky summary by way of chart
Readers, what type of mutual funds you are investing?
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Types of mutual funds in India