With so much buzz around the promising future of the Indian
economy, articles expecting Sensex at 70,000 by the end of 2022, and the
existing COVID fears, you might also have participated in the debates of mutual
funds vs. stocks. If you are among those who want to play safe while being part
of the journey of the Indian economy, this article is for you. In my previous
articles, I had explained mutual funds and its benefits. However, knowing these would not be enough until you are aware of
the various types of mutual funds. These are mainly based on the risk appetite, investment horizon, and asset
class.
Through the figure below, I have tried to simplify these categories for you. However, at the same time, I have tried not to make it complex and have avoided less popular categories of funds.
Open-ended funds: Investors can buy any number of units and can exit at any time.
Closed-ended funds: Unit capital to invest is predefined and exit is not allowed
before the pre-defined maturity tenure.
Interval funds: Mix of open and closed-ended. Purchase or redemption is allowed only during specific intervals.
Based on asset class:
Equity funds: Larger proportion of funds is invested in shares.
Debt funds: Larger proportion of funds is invested in debt instruments, such as bonds, treasury bills, and commercial papers.
Money market funds: Invests in liquid instruments like treasury bills, commercial papers, certificates of deposits that mature in less than 91 days.
Hybrid funds: Mix of equity and debt
Based on investment goals:
Growth funds: Invests in high growth stocks, trading at a high Price to Earnings (PE) ratio.
Income funds: Aim to generate regular income through investing mostly in govt. securities, bonds, and other debt instruments.
Liquid funds: Invests in liquid instruments with a maturity of less than 91 days. Offer 1-2% higher return than a savings bank account.
Tax saving /Equity Linked Savings Schemes (ELSS): Invests in equity with a minimum lock-in period of three years.
And that's not the end...
Mutual funds could be further categorized into:
Sector Funds - These funds invest in only one sector or around a particular thematic area, like technology, financial services, etc.
Index Fund: It seeks to track the returns of a market index, such as NIFTY 50 or Sensex. The proportion of investment in various shares is the same as their weightage in the index. The Exchange Traded Funds or ETFs belong to this category of funds. ETFs can be bought and sold on exchanges just like shares of a listed company.
…It’s still not the end, as you can notice in the figure above, there are possibilities of many combinations of different classes of mutual funds. However, once you have an understanding of these broader classifications, it would be easier to grasp the concept of others. You can dig deeper through these articles explaining further categorization of equity, debt and hybrid funds.
