What are the various types of Mutual Funds?
Today, there are varieties of mutual funds available for investment. Many of these funds are known as income fund, growth fund, liquid fund, balanced fund, tax saving fund, open ended fund, closed ended fund etc. These funds can be classified into two categories: either by the Maturity Plans or by the Investment Objectives. These funds are discussed below:-
Based on the Maturity Plan
Based on the maturity plan, there are three types of mutual fund schemes. They are known as Open ended Fund, Close ended Fund and Interval Fund. These funds are discussed below:-
- Open ended Fund: – An open ended fund is a type of funds that do not have a fixed maturity date. These funds are generally available for subscription throughout the year. In open ended schemes, an investor can buy and sell units at current Net Asset Value (NAV) on specific period during market hours.
- Close ended Fund: – A close ended fund is a type of funds that have a defined maturity period (generally ranging from 3 to 15 years). These funds are generally listed on a recognized stock exchange and available for subscription for a specific period at the time of initial launching.
- Interval Funds: – An Interval fund is a type of funds that combine the features of both the open ended fund and the close ended funds. These funds may be traded on stock exchanges or available for redemption at predetermined intervals on the current NAV.
Based on Investment Objectives
Based on the Investment objectives plan, there are five types of mutual fund schemes. They are known as Equity/Growth Fund, Debt/Income Fund, Balanced Fund, Money Market/Liquid Fund and Gilt Fund. These funds are discussed below:-
- Equity/Growth Funds: – In Equity/Growth funds, the major part of its corpus (minimum 65%) is invested in equity or stocks or related securities. The investment objective of these funds is long term capital growth. By buying shares of equity mutual funds, investors become a part owner of each of the securities holding in portfolio. These types of funds are specially recommended to such investors who take higher risk.
- Debt/Income Funds: – In Debt/Income funds, the major part of its corpus (minimum 65%) is invested in fixed income securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds provide low risk and stable income because of its low volatility rate compared with equity fund.
- Balanced Funds: – Balanced fund is a combination of both equity and fixed income securities, where 60% of its corpus is invested in equity and 40% in debt instruments. As a result, these types of funds provide both stability of returns and capital appreciation to investors.
- Money Market/Liquid Funds: – In Money market/Liquid funds, almost the entire corpus is invested in the safest short term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper especially for a period of less than 91 days. These funds provide easy liquidity, preservation of capital and moderate return.
- Gilt Funds: – In Gilt funds, the entire corpus is invested exclusively in government securities. However these funds carry no credit risk as they are associated with interest rate risk. These types of funds are very safest mode of investment as they invest in government securities.