To invest in the right mutual fund scheme, one must have the perception of the types of mutual funds available and which are risky and low-risk profile funds. They can be classified into various categories based on structure, assets and investment objective.
Open-ended mutual funds: Majority of the mutual funds are open-ended as it offers the convenience of purchasing unlimited shares of investments in stocks and bonds. The investors can purchase or redeem the funds all through the year. There is no restriction on buying and selling the shares. This type of mutual funds can be withdrawn anytime as it is not bound by maturity period.
Closed-end mutual funds: This type of mutual funds have minimum of three years of lock-in period where the investors cannot withdraw the plan before the maturity period. Moreover, closed-end funds cannot be routed through Systematic Investment Plans which allows as minimum as INR 500 for investment. But closed-end funds require a lump sum investment.
By Asset Class
Debt funds: Debt mutual funds are the tools to invest in fixed income securities like bonds and treasury bills. This type of funds is recommended for beginners who do not want to take risk in mutual fund investment.
Equity funds: This type of mutual funds invest in equity stocks of companies offering shares and ownership. The returns are volatile and depends on the performance of the stocks. This type of funds is ideal for well-experienced portfolio managers as it involves risks.
Money market funds: This mutual fund invests only in commercial papers, commercial bills and treasury bills. Being a low-risk mutual fund, it allows you to park surplus money and redeem it in a short period of time like within 15 days.
Balanced funds: This mutual fund invests in mixed assets, mostly 65% in equity stocks and the rest in other assets. This is not totally risk-free investment as a considerable percentage is invested in stocks.
By Investment Objective
Growth funds: The growth funds reinvest the profits again in the same scheme. Hence this will have higher NAV than the other mutual fund types.
Dividend funds: This type of funds gives you the profit obtained from the investment from time to time. Unlike growth funds, it does not reinvest the profits in the same scheme.
Tax saving funds: These funds are invested in equity funds and the profits gained from it are not taxed. It is a risky investment, but it gives good returns in the long-term.
Pension funds: This is an avenue to invest funds for long-term goals specially to get the benefit of high returns during retirement. This is invested both in equity and debt funds which also get you tax benefits for up to 1.5 lakhs under section 80C.
Liquid funds: This is type of fund that invests money in short-term period schemes such as commercial papers and bills. This is ideal for short-term investment plans.
Capital protection funds: This type of funds invests in both equity and fixed income instruments so as to give complete protection to the capital amount invested. This is a low-risk fund suitable for beginners.
Gilt funds: This is a risk-free mutual fund investment which is invested in government securities. For beginner, this is an ideal scheme to gain a moderate profit in the long run.
Investing in the right mutual fund requires a careful study before making the move. Being informed about the types of investment is a bonus to choose the best mutual fund investment plan.