Different Types and Categories of Mutual Funds

Different Types and Categories of Mutual Funds

There are several varieties of mutual funds available in the market. In this Article, I will give you the basic idea about the different types and categories of mutual funds. Read and understand them carefully so that you can take the informed decision while buying the mutual funds.

The Mutual Funds can be classified in two ways. One is

01) Open Ended Mutual Funds – It means the funds from which you can exit any time you want. They don’t have any lock-in period.

02) Close Ended Mutual Funds – These are the funds which have a minimum of 3 years of lock-in period. Means you can not exit from that fund before completion of the lock-in period.

The Other Classification is more important which is based on the classification according to the underlying assets.

01) Equity funds -

These are the mutual funds which invest in equities (Stocks). These funds primarily invest in the stock markets and generate returns for you. The are divided into following types.

a) Index Funds, Exchange Traded Funds (ETFs) – These are the funds which have portfolios which is the mirror image of the underlying Index. Say for Example, if the underlying index is Sensex than these funds will have 30 stocks portfolio in the same proportion as that of the Sensex. And that’s why these funds will closely track the performance of the underlying Index.

Exchange Traded Funds also known as ETFs are the cousins of the Index Funds. Means they also have the underlying index as the benchmark. But the only difference between the two is that, Index fund units can be bought and sold from the fund house only while the ETFs are listed on the stock exchange just like any other stock and you can buy and sell ETFs on the stock market directly at real time prices. In other words, ETF trading means trading the entire Index at a time.

b) Equity Diversified Funds – These are the funds which have diversified stocks portfolio. Means these funds can invest your money in all the economic sectors.

c) Sector Funds – These are the funds which invest mainly in some specific sector of the economy as per defined in their objectives.

d) Equity Linked Savings Schemes (ELSS) – These are the Tax Saving mutual funds (Equity) having 3 years of lock-in period and tax benefits.

02) Debt Funds -

These are the mutual funds which mainly invest in the debt securities. These are the safer funds than the equity funds because they invest in the debt securities. The debt funds mainly invest in the Corporate bonds, Government securities, Treasury bills, Commercial paper, certificate of deposit and call money market, Here are the various types of debt funds.

a) Income Funds – The main purpose of these kind of debt funds is to generate a regular and steady income for the investors.

b) GILT Funds – Gilt funds invest only in the government securities (T-Bills) and nothing else. And that’s why they are safest of all. This is because it is believed that the government never defaults in its payments.

c) Liquid Funds – The Income & Gilt funds are the options for the medium to long term. While the Liquid funds cater to short term – an Investment horizon of up to one year. These are the funds to generate some short term returns from your surplus money.

d) Short-term Funds – Short term funds are open ended income funds but with a medium term focus. They achieve an average maturity of about two years, by investing mainly in the money market instruments. In addition they take some exposure to long term Government Securities (10-35%).

e) Flexible Funds – All the above types of debt funds are bound to invest primarily in the Government and corporate securities. However, if you seek extra returns from the debt funds and have faith in your fund manager’s ability to take the right calss than go for flexibility funds.

03) Balanced Funds (Hybrid Funds) -

These Funds are also known as Hybrid Funds. This is because they invest both in Equity and Debt. The main purpose of the balanced funds is that, the equity will ensure the high returns and the debt will ensure the safety of your principle.

Monthly Income Plans (MIPs) – There are several variants of the Balanced funds according to the composition of equity and debt. However, the Monthly Income plans are the most commonly used plans. The main purpose of these monthly income plans is to generate a regular and fixed monthly income from your money.

04) Fund of Funds (FoF) -

These are the funds which don’t directly invest in the equity or debt directly but these are the funds which invest in other mutual funds. The fund manager of these funds build a portfolio of other reputed mutual funds and generate returns for you.

05) Dynamic Funds -

All the mutual funds schemes have to spell out in their offer documents that how much money they are going to invest in equity or debt. Say for Example, Equity funds have to spell out that minimum 65% of your money will be invested in the equities and like that.

However, Dynamic funds don’t need to do this. Dynamic funds can invest and adjust the equity:debt ratio of your money to any level. It can invest any amount of money in any proportion in equity and debt according to the market conditions.

06) Gold Funds -

They are also known as Gold ETFs. These funds invest your money in physical gold and store it in their store houses. And you can buy and sell the units of these funds on the stock exchange according to the real time price of the gold in the international markets.

07) Real Estate Funds -

These are the funds which invest either in the real estate projects, open lands or in the rental properties. And buy selling the real estate for the huge profits or generating rental income from their real estate properties portfolio, they provide the returns to the investors.

08) Art Funds -

These funds invest your money to buy the art. Keep that art for few years and later on sell that art by auction and generate profits for you.

09) Global Funds (Funds Investing in International Securities) -

These are the mutual funds which mainly invest in the international securities. Means they invest in the stocks and debt papers of the various countries from all around the world.