Mutual funds are the most suitable way for small investors who want to profit from their savings. A trusted fund should have specialists who specialize in how to trade on the stock exchange among its managers. The types of mutual funds are divided according to their investment objectives.

What are the different types of mutual funds?

In the following lines, we describe in detail the types of investment funds:

1. Equity funds

Equity funds mainly invest in stocks, so they are known as equity funds.

They invest the money collected from different investors from diverse backgrounds in stocks of other companies.

The gains and losses associated with these funds depend solely on how the shares invested in them perform (the price goes up or the price goes down) in the stock market.

Also, stock funds can generate significant returns over a period of time. Thus, the risks associated with these funds also tend to be relatively higher.

2. Debt funds

Debt funds invest primarily in fixed income securities such as bonds, hedge funds and treasury bills.

They invest in various fixed income instruments, such as fixed maturity plans, gilded funds, liquid funds, short-term plans, long-term bonds, and monthly income plans.

As the investments come with a fixed interest rate and maturity date. They can be an excellent choice for passive investors who are looking for regular income (interest and capital appreciation) with minimal risk.

3. Money Market Funds

Investors trade stocks on the stock exchange. In the same way, investors also invest in the money market, also known as the capital market or money market.

It consists of the government in association with banks, financial institutions and other companies through the issuance of money market securities such as bonds, treasury bills, dated securities and certificates of deposit.

The fund manager invests your money and pays them regular dividends in return. Choosing a short-term plan (no more than 13 months) can significantly reduce the risk of investing in these funds.

4. Hybrid chests

As the name suggests, hybrid funds (balanced funds) are a perfect blend of bonds and stocks, thus bridging the gap between equity funds and debt funds.

The ratio can be either variable or fixed. In short, it takes the two best mutual funds by splitting the investment value. For example, 60% of the assets are in stocks, the rest in bonds or vice versa.

Hybrid funds are suitable for investors who are looking to take on more risk in exchange for the benefits of “debt plus returns” rather than committing to low-income but fixed-income plans.

5. Mutual funds based on the structure

Mutual funds are also categorized based on various attributes (such as risk profile, asset class, etc.).

The structural classification is comprehensive: open, closed and interval funds. Differentiation mainly depends on the flexibility to buy and sell units of mutual funds.

6. Open chests

1. Open funds do not have any specific restrictions, such as a fixed period or the number of units that can be traded.
2. These funds allow investors to trade the funds at their convenience and exit when needed at the prevailing rate (net asset value).
3. This is the only reason why unit capital is constantly changing with new entries and exits.
4. An open fund can also decide to stop accepting new investors if they don’t want to (or can’t manage big money).

7. Closed chests

In closed funds, the capital of the unit to be invested is determined in advance. The fund company cannot sell more than the previously agreed number of units.

Some funds also come with a new money offering period; Where there is a deadline for purchasing units. Non-financial organizations come with a pre-determined vesting period with fund managers open for any fund size.

Hence, the Securities and Exchange Commission has mandated that investors choose either the option to buy back or to list money on exchanges to exit the schemes.

8. Comma squares

Interval chests have the characteristics of both open and closed chests. These funds are only open for purchase or redemption during specific periods of time (determined by the fund house) and closed the rest of the time.

Also, no transactions will be allowed for at least two years. These funds are suitable for investors who are looking to save a lump sum for a short-term financial goal, for example, in 3-12 months.

9. Growth Boxes

Growth funds typically allocate a large portion of the equity and growth sectors. It is suitable for investors (primarily millennials) who have a surplus of idle money to be distributed to riskier (albeit high-return) schemes or who are optimistic about the scheme.

10. Income Funds

Income funds belong to the family of debt mutual funds that distribute their money in a mixture of bonds, certificates of deposit, securities, and more.

Backed by skilled fund managers who maintain the portfolio along with price fluctuations without compromising the creditworthiness of the portfolio. Historically, income funds for investors have generated better returns than deposits. It is best suited for risk averse investors with a two to three year perspective.

11. Investment of liquid funds

Like income funds, liquid funds also belong to the debt fund category because they invest in debt and money market instruments for up to 91 days.

A notable feature that distinguishes liquid funds from other debt funds is the manner in which the net asset value is calculated. The net asset value of liquid funds is calculated for 365 days.

12. Tax Provident Funds

ELSS or Equity Linked Savings System has, over the years, risen through the ranks of all classes of investors. Not only does it provide the advantage of maximizing wealth while allowing you to save on taxes. But it also comes with the lowest insurance period of only three years.

They mainly invested in stocks (and related products). They generate untaxed returns in the range of 14-16%. These funds are best suited for paid investors who have a long-term investment horizon.