Types of Mutual Fund Investment: There is a basic principle of investing that never invest all your capital in one instrument. Instead, if you invest your capital in more than one instrument, then if the return in one instrument is less, then it gets compensated faster in other instruments. Mutual funds provide a better option to most investors to build this type of diversified portfolio. In this investment is also associated with risk, but the risk is less on them as compared to investing in equity directly. There are many mutual fund options available in the market, which investors can choose according to their risk appetite. Mutual funds invest money in equity or debt or both.
There are two types of mutual fund schemes
Mutual fund schemes can be broadly classified into two categories – open-ended funds and close-ended funds. In open ended funds, the investor can invest or redeem at any time i.e. they do not have any fixed maturity period. On the other hand, close ended funds have a fixed maturity date. In these types of funds, the investor can invest in the initial period like New Fund Offer and the investment in this is automatically redeemed at a fixed time. Close ended funds are also listed on the stock exchange.
FD: Get FD here and get regular payment on time, senior citizens will get interest at higher rates
Mutual fund schemes available for investment
Equity or Growth Schemes: It is one of the most preferred options for investment. Through this, investors get the option of investing in the stock markets. The risk is very high in these because under this scheme the capital is invested in equity but returns are high in it. It is better for such investors who have just started their career and want to get higher returns from investments in the long run as they have high risk appetite.
Equity funds can be classified into three categories – Sector Specific Funds, Index Funds and Tax Saving Funds.
- Sector specific funds invest money in a specific sector such as infrastructure, banking, mining etc. or specific segments such as mid cap, small cap or large cap. Coming to index funds, it is better for investors who want to invest in equity mutual funds but do not want to depend on their fund manager.
- Index mutual funds follow the same strategy on which it is based. Investing in index funds is better for investors with moderate risk appetite.
- Coming to Tax Saving Funds, this fund invests the investor’s capital in equities and with a lock-in period of 3 years, this fund gets the benefit of tax deduction under section 80C. These are called Equity Linked Savings Schemes (ELSS).
Multi-Currency Account: Transactions can be done in more than 30 currencies, these accounts are better for students and investors like this
Money Market Funds or Liquid Funds: These funds invest in short term debt instruments and give better returns to the investors in a short period of time. These funds are better for such investors who have low risk appetite and want to invest their extra capital somewhere in the short term. This is a way to keep your money in the savings account of the bank.
Fixed Income or Debt Mutual Funds: Most of the money in this fund is invested in fixed coupon bearing instruments like government securities, bonds, debtors. There is less risk in this but the returns are also less. This is a better option for such investors who have low risk appetite and are looking for a stable income option. However, there is a credit risk associated with investing in them.
Balanced Funds: These are mutual fund schemes in which the investors’ capital is invested by mixing equity and debt. The capital invested in equity and debt is decided on the basis of market risk. These are a better option for such investors who want moderate returns with low risk.
Hybrid/Monthly Income Plans (MIPs): These are similar to balanced funds but the share of equity assets in MIPs is less as compared to balanced funds. Hence it is also called Marginal Equity Funds. These are a better option for such investors who have retired and want regular income with relatively less risk.
Gilt Funds: These funds invest only in government securities. This is a better option for such investors who have less risk appetite and do not want to take more risk with their capital. In this, high interest rate risk is attached to the investment.