Mutual funds are a useful investment platform that can help you grow your wealth. When you make a mutual fund investment, your money is combined with the money from other investors, which allows you to buy part of a pool of investments. An experienced investor knows what is a mutual fund and how to invest in it wisely to reap maximum returns.
If you are a novice investor, this article lists the different types of mutual funds based on their asset class for smarter investment decisions.
Types of mutual funds based on the asset class
- Equity Funds
These are funds which invest in equity stocks or shares of companies. These can provide high returns, but at the same time, they are considered as high-risk funds. Equity funds can include speciality funds such as banking, fast-moving consumer goods and more.
- Debt Funds
These are funds which invest in fixed-income securities such as treasury bills, bonds, government securities and more. It includes fixed maturity plans, liquid funds, short-term plans and more. If you are a passive investor on the lookout for small but regular income, this could be the right option to choose. Debt funds have minimal risks as compared to equity funds.
- Money-market Funds
Similar to how some investors trade stocks in the stock market, you can trade money in the money market. It is also known as the cash market or capital market. Generally, it is run by corporations, banks or the government by issuing T-bills, certificate of deposits, bonds and dated securities, among others.
- Hybrid or Balanced Funds
Hybrid or balanced funds are an ideal mix of equity and debt funds that invest in an optimum mix of bonds and stocks. The ratio of investment can be fixed or variable. These can be an ideal option for investors looking to invest a substantial portion of their funds and willing to take more risks for ‘debt plus returns’.
- Sector Funds
In these funds, you can make an investment in a particular sector or division of the market. For example, infrastructure fund investors invest in infrastructure companies alone or investments offered by infrastructure companies. Thus, the returns you earn are directly proportional to the performance of that particular sector. The risk varies from one industry to the other based on its performance.
- Index Funds
Simply put, index funds put money in an index. It identifies stocks and their corresponding ratio in the market index and puts money in the exact proportion in similar stocks. For those who do not wish to take the risk of how a fund manager performs, index funds can be an ideal choice.
- Tax-saving Funds
These funds majorly invest in equity shares and are most suited for salaried and long-term investors. Tax-saving funds allow you to claim tax deductions under the Income Tax Act. They offer the double benefit of building wealth as well as help you save on taxes. A classic example of this fund type is ELSS or Equity Linked Saving Scheme.
- Funds of Funds
These funds invest in other mutual funds of diverse fund categories. Thus, instead of investing in several mutual funds to diversify your investment portfolio, you can invest in one fund which already invests in various funds for you. It also helps you save on cost.
With different types of mutual funds to choose from, picking one that suits your specific investment needs can be a challenging task. It is recommended first to understand your own needs, the risk you are willing to take, and the financial goals you wish to accomplish before investing.