So, you have made up your mind to invest in mutual funds considering the massive investment diversification they are widely known for. To give you a short-little wrap of mutual funds, it can be said that they are a pool of funds collected from a wide range of large, mid and small investors for a common investment goal.
Then, there is a fund manager who works round-the-clock to ensure your money is invested in the right place at the right time for the right result. But where many get confused are the types of mutual funds they should subscribe to. You need to be damn sure of your financial goals, risk-appetite, investment horizon before selecting the best funds for you.
Types of Mutual Funds
Mutual funds come with a wider category of schemes designed for a unique investment goal of the investors. The funds are broadly classified into-
Equity Funds – If you want to fulfill goals like the education and marriage of your child in about 20-30 years time, it is better to invest in equity funds provided you are into the 30s as it gives you a lot of years to build on the capital. These funds invest mainly in equity and equity related instruments. A marginal allocation is also made in debt instruments to ensure a regular flow of income. Bear in mind that the risk element is on the higher side with equity funds because of the massive volatility that the stocks, where a maximum asset allocation is going to be made, experience on a day-to-day basis.
Debt Funds – Can’t afford a high risk? Debt funds are going to be your friend. They primarily invest in debt instruments like bonds, debentures and other debt instruments. The return potential of these funds is not considered to be at par with the equity counterparts. So, these funds are most suitable for the retirees who can get a regular flow of income to deal with the day-to-day expenses.
Balanced Funds – Want to taste the slice of both capital appreciation and income generation? You have balanced funds to achieve the same. These funds invest in a mix of equity and debt instruments in the proportion deemed fit by the fund managers based on the market conditions that would be there from time to time. The equity investments would look to appreciate the invested capital, while the investments made in debt would ensure a regular flow of income.
Sector Funds – A part of equity funds, the sector funds aim to leverage from the positive cues developing across various sectors of the economy. Looking at the performance of the current trends, the fund managers look to shuffle the investments across the stocks of a particular sector. The scope for diversification, though, is quite less here compared to other funds. If a sector keeps being in the ‘Red’, it could negatively impact your investment value. So, before investing here, do keep a look on the experience of the fund managers as to how he has fared in testing times.
ELSS Funds – Equity linked Savings Scheme (ELSS) is a perfect tool for someone wanting to enjoy the tax benefits of mutual funds. The investments in ELSS offer tax deduction from the annual gross income for upto ₹1.5 lakh in a financial year. The tax benefits are applicable under Section 80C of the Income Tax Act. The investments made here are locked for 3 years, lower than the competing products such as tax-saving fixed deposits, public provident fund, etc.
Liquid Funds – Seeking a higher liquidity from the investment? Go no further than liquid funds that invest in liquid instruments such as treasury bills, certificates of deposits, commercial papers, and others.
Ultra Short Term Debt Funds – These funds invest in highly liquid, fixed income securities with short-term maturities. Even though these funds reduce the interest rate risk for the investors, it is still affected by the market fluctuations.
Index Funds – These funds are constructed with a portfolio constructed to match or track the components of the indexes such as BSE Sensex, NSE Nifty. However, there is no support of fund manager in the case of index funds.
So, you can see the explanation of several types of mutual funds catering to different needs of the investors. Always keep things like your financial goals, risk-taking ability and the investment horizon before deciding on the funds to invest.
Disclaimer– Mutual Funds are subject to market risks. Please read the scheme related documents carefully before investing.