What are the different types of mutual funds?
Open ended funds
Open ended funds allow investors to subscribe or redeem units as per the prevailing Net Asset Value (NAV) on a continuous basis. Basically, what you get with open ended funds is liquidity and flexibility of time.
Close ended funds
Listed on the stock exchange, these funds come with a fixed maturity date, like 3-6 years. Investors can opt to subscribe to close ended funds at the time of initial launch.
These funds are a hybrid of open and close ended funds. While they operate mainly as close ended funds, these funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals at the prevailing NAV.
If you are investing in equity growth funds, then you are largely putting your money in stocks. The main objective of these funds is to achieve long-term capital growth. Equity funds invest at least 65% of their corpus in equity and equity-related securities. These funds may invest in a wide range of industries/sectors or focus on one or more sectors. These funds are suitable to invest in if you have a higher risk appetite and you have a long-term financial goal.
Following a simpler approach, debt/income funds usually invest 65% of the amount in fixed income securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds are likely to be less volatile than equity funds.
With an aim to provide stability of returns and capital appreciation, balanced mutual funds invest in both equities and fixed income instruments. These funds generally tend to invest around 60% in equity and 40% in debt instruments such as bonds and debentures.
Money Market/Liquid Funds
If you are looking for a fund that offers liquidity and capital preservation with moderate income, then this is a suitable choice. Money market/liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for less than 91 days. These funds are ideal to invest in if you are a corporate or an individual investor and wish to earn moderate returns on surplus funds.
Gilt mutual funds invest exclusively in government securities. The Gilt funds do not carry a credit risk - where the issuer of the security can default. However, it comes with an interest rate risk i.e. risk due to the rise or fall in interest rates.
Tax Saving (Equity Linked Savings Schemes/ELSS) Funds
The Income Tax Act offers tax deduction under specific provisions of the Income Tax Act, 1961. Designed to generate capital growth, ELSS mutual funds invest primarily in equities and largely suit investors with a higher risk appetite for capital appreciation. Spread over medium to long-term, tax saving funds comes with a lock-in period of 3 years.
Index funds are attached to a particular index such as the BSE SENSEX or the S&P CNX NIFTY. Their performance is linked to the results of that index. Here, the portfolio comprises stocks that represent an index and the weightage assigned to each stock is in line with the identified index. Hence, the returns will be more or less similar to those generated by the Index.
Sector-specific funds invest in the securities of a specific sector or industry such as FMCG, Pharmaceuticals, IT, etc. The returns on these funds are directed by the performance of the respective sector/industries.
Sector funds allow an investor to diversify funds across multiple companies within an industry. These funds tend to be riskier as the performance is directly linked to that of the overall sector.