06 Jan Types of Mutual Funds
SIPs, Mutual Funds are the Buzzwords. What investment options suits your GOALS is the KEY to your decisions.
The financial industry is ever evolving with new products & schemes. This makes trainers like me more responsible in educating retail investors & individual financial advisors (IFAs) which helps in right selection of products & advising right products respectively.
What if your wealth, if not compounded, over several years of investing?
Only 10% of retail investors consider mutual fund schemes as an investment option. Mutual fund is still considered to be a highly-risky investment proposition.
Understanding details of mutual fund & it’s types tells you how mutual fund schemes are flexible, easy investment methodology is available & how every investor’s needs can be accommodated.
Types of Mutual funds are as follows:
1) Open-ended mutual funds: Investors are allowed to buy or sell units at any point of time. There is no maturity date in this case. Further classification of these funds are as follows:
a) Debt/Income scheme –Funds in this option are channelized in debentures, government securities, debt instruments. People who want to invest in low risk mutual fund schemes. This is a good option with steady income.
b) Money Market/Liquid Fund –Investors who are looking for short term utilization of funds should go for these schemes. Here the funds are invested in short-term debt instruments & provide reasonable incomes.
c) Equity Growth Schemes –Most popular scheme amongst investors and can be availed for both short-term & long-term investment options. Though investing short-term can be a risky proposition. This schemes, if availed for long-term, can generate higher capital returns. Equity schemes are advisable for long-term gains. These funds are further grouped under 3 categories:
- Index Scheme –In this case movements of NIFTY, Sensex, etc., are replicated by investments.
- Sectoral Scheme –These schemes are governed by the proposition of higher risk and higher returns. The funds here are classified on sectors, industries & segments: mid caps & small caps sectors
- Tax Scheme –Usually these schemes have 3 years lock-in period. As the name suggest they benefit the investors to save taxes. Usually recommended for medium & long-term investments options and they do give good returns.
d) Balanced Schemes –These schemes are both growth & income oriented. Investors enjoy incomes at regular intervals from these schemes. Equities & fixed incomes both options are predetermined in these schemes in proportions given in the scheme offer document.
2) Closed ended mutual funds: These funds allow investors to invest only during launch i.e. NFO (New Fund Offer). These funds have a given maturity period. Further categories under closed ended funds are as follows:
a) Capital Protection Schemes –In this option the principal amount of the investor is safeguarded. Funds are invested in high-quality secured options. Very less exposure is given to equity options. Reasonable returns are delivered upon maturity.
b) Fixed Maturity Schemes –As the name suggest, these schemes have a fixed maturity period. These are passively managed debt schemes and no trading happens for these debt instruments. An interest is earned upon maturity.
3) Interval Mutual Funds – These are combination of open & closed ended mutual funds. Investors trade units of these fund at predefined intervals.
Maturity period of each scheme, expected returns i.e. goals, investment period involved, risk taking ability & age of investor predominantly governs one’s choice of investment schemes. The investors appetite governs proper financial & investment plan & an expert’s advised is needed.
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Author: Alpa Shah at NextLevel–Education