At a time when there are a plethora of investment options available, mutual fund has emerged as one of the most popular choices among the investors owing to its diversified asset allocation. Mutual fund is a pool of money collected from a wide range of investors having a common financial goal. Asset Management Companies (AMCs), which have a myriad of mutual fund schemes on offer, appoint fund managers who do in-depth research before allocating the investments across securities such as stocks, bonds, money market instruments, etc. The allocation, however, depends on the investment objective of the chosen scheme.
Types of Mutual Funds
Based on what your financial goals and risk appetite are, you can choose from the following types of mutual funds-
- Equity Funds
- Debt Funds
- Balanced Funds
- Liquid Funds
- Index Funds
Equity Funds – These funds, with an objective of capital appreciation, invest primarily in the stocks of the companies. The risk ratio here can be on the higher side. But long-term investment can yield better results. These funds are ideal for investors with a high-risk taking ability. So, if you can bear decline in value in the short-term for future appreciation, equity funds welcome you with open arms.
Debt Funds – An eye on generating regular incomes? Choose debt funds that invest in a mix of fixed income securities such as bonds and corporate debentures. Normally, it’s the retirees or someone who is seeking regular income can find debt funds appealing.
Balanced Funds – Also called as hybrid funds, balanced funds have a dual objective of capital appreciation as well as income generation. These funds invest in both stocks and fixed income instruments in the proportion as shown in the offer document. In the times of stock market upswing, the NAV of these funds may not necessarily keep the same pace. And when the market falls, the NAV may not decline in the same proportion. So, if you are eyeing both capital appreciation and income generation, you can bet on balanced funds.
ELSS – Equity-linked saving scheme (ELSS) is an open-ended mutual fund which enables the investors to gain tax exemption as well as the raise the capital with time. The amount of investment here is deductible from the gross annual income in a financial year. The investment, which comes with a lock-in period of 3 years, offers a maximum deduction limit of ₹1.5 lakh in a financial year. The tax benefits are applicable to the financial year in which you would have invested in the scheme.
Liquid Funds – Setting your eyes on easy liquidity and greater protection of the invested capital? Don’t go any further, pick liquid funds that normally invest in safer instruments with a short-term maturity, such as commercial paper, treasury bills, inter bank call money, certificate of deposits, etc. However, the income generation can be moderate in the case of liquid funds.
Index Funds – Being passively managed, these funds buy all the stocks in the same proportion to that of the benchmark index. These funds mirror the performance of the index and remove the role of a fund manager who actively manages your investments by picking stocks based on the market conditions. The index funds do come with a lower operating expenses compared to actively managed funds.
DISCLAIMER – Mutual Fund investments are subject to market risks. Please read all the scheme related documents carefully before investing.