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Types of Mutual Funds -Part 2

Mutal Funds

 

 

In this video by Franklin Templeton India, you will learn about the different types of mutual funds you can invest in based on your investment objectives. We will also let you know what kinds of mutual funds you can consider based on your risk tolerance. In the end, if you still require guidance on selecting the best mutual fund for you, do let us know in the comments section below. 

 

Introduction

 

A mutual fund is an investment instrument through which individuals can invest their income and gain significant investment returns over time. The fund is managed by experienced fund managers who collectively invest the pool of money, also known as Asset Under Management (AUM), into different asset classes. Therefore, mutual fund investment has lately become a complex topic, as a type of mutual funds depends on various factors such as the structure of the fund, the risk appetite of the fund, the speciality of the fund, and the goals of the fund (both short/long term). 

 

In Part 1 of the “Types of Mutual Funds” series, we covered mutual funds based on structure, i.e. open-ended, close-ended, and interval funds. In this article, we will focus on the other types of mutual funds and some advanced mutual funds launched recently.

 

 

 

 

Types of Mutual Funds based on Investment Objectives

 

Based on the characteristics, there are majorly 4 types of mutual funds, each of which serves a different purpose. Mutual fund schemes are designed to serve these niche goals and objectives. Following highlight these broad categories

 

 

An equity fund is a kind of mutual fund which majorly invests almost its entire corpus in the stocks of corporations. These corporations can be local or global, depending on the nature of the mutual fund. The equity funds can also focus on the industry type and size and the market capitalisation of the industry or the corporation. Moreover, there are many types of equity mutual funds based on market risk and sectoral specialisation.

 

 

A debt fund is a kind of mutual fund that invests in asset classes with a fixed income. These asset classes can include bonds, certificates of deposit (CDs), money market instruments, or securitised products.

 

 

A hybrid fund invests in a cross-functional asset class. Usually, these funds invest the Asset Under Management (AUM), i.e., the pool of money they receive, on a mixed class of assets. These asset classes can range from high-risk, high-income asset classes such as stocks to fixed-income, low-risk asset classes such as bonds.

 

 

Tax-saving mutual funds are the ones whose primary purpose is to get tax benefits or exemptions from the amount of money invested in the product. These funds have a mandatory lock-in period of any number of years and do not focus on returns.

 

 

If you are looking for a mutual fund to help you get a steady income after retirement, retirement funds are the best option. Retirement funds have long mandatory lock-in periods and are usually risk-averse, i.e., most of the corpus is invested in safe places.

 

Types of Mutual Funds based on risk

 

Mutual fund investment types are also based on risk factors since these are major contributors to making investment decisions.

 

 

Large-cap mutual funds cover the 100 biggest companies in terms of market value listed on the stock exchange in India. The fund performance of large-cap mutual funds mimics the performance of the concerned corporation on the stock market itself. Therefore, it is ideal for individuals who want to play it safe and do not want to indulge in high or medium risk. The returns of these funds are significant and provide a good return on investment.

 

 

Mid-cap funds are the ones which invest in the equities of firms whose market capitalisation is in the range of middle ranged listed stocks. These funds carry more risk than large-cap mutual funds but often reap considerable benefits in terms of annual return on investment (ROI)

 

 

Small-cap funds are the ones which invest in the equities of firms whose market capitalisation is in the range of the lowest-ranging stocks. These funds carry the highest risk among all funds based on market value but often reap the most benefits in terms of annual return on investment (ROI)

 

Miscellaneous

 

 

Riding on the wave of the COVID-19 pandemic, the pace of change has increased like never before. Rapid digitisation has reinforced the forces of globalisation; and therefore, it has become imperative for people from one corner of the world to leverage the gains produced in another part of the world.

 

Global funds are mutual funds which invest their corpus in international technology firms. They are passive funds; hence, they do not require any active monitoring from our end.

 

How to Choose the Right Mutual Fund?

 

Now that we have adequate information on the major type of mutual funds based on their features and the objectives they serve, we can choose the right mutual fund based on our long-term and short-term goals, needs and aspirations. Our needs are the best anchor to guide our decisions on choosing the right mutual fund. All we need is good information.

 

Conclusion

 

With this series, we have covered the mutual investment scheme ecosystem in India and around the world. This information will help you redefine your investment journey and help you choose a fund that is aligned with your aspirations and long/short-term goals.

 

Interested in how we think about the markets?

 

Read more: Zen And The Art Of Investing

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