Mutual funds are one of the most lucrative investment options, both for short and long timeframe. Private companies, as well as government-owned enterprises, release mutual funds for public investment. There are numerous mutual fund schemes available in the market which can possibly confuse any newbie investor. So, in this short article, we have compiled the different types of mutual funds and a risk-reward factor associated with each of them.

Note: We have not provided any direct recommendations for mutual funds as it is strictly against our policy. The examples given in context of types of mutual funds is just for illustration purpose.

What is a Mutual Fund?

A Mutual Fund is a pool of money put together by individuals/companies termed as ‘Investors’. This accumulated capital is invested on the behalf of the investors in equity shares, Government securities, bonds etc by ‘Fund managers’.

The income generated and the capital gains gathered are shared with the unitholders in a ratio of the units owned by them. The investors are entitled to profit when the underlying securities’ prices surge, and they bear losses when prices fall. The mutual fund needs to be registered with the financial regulator in a country. For example, mutual funds in India are regulated by the Securities & Exchange Board of India (SEBI).

Also Read: Mutual Funds Investment: Advantages and Disadvantages

Mutual Fund Categories

Mutual funds can be divided into two broad categories:

Open funds– An open-ended is a type of mutual fund which has no restriction on the number of shares they release. This type of fund is hugely popular due to the allowance of entry into the fund at any given point of time.

Closed funds– It is similar to a mutual fund where investment is pooled, raising a fixed amount of capital through initial public offering and then listed and sold like a stock on an exchange.

Types of Mutual Funds to invest

Broadly, there are seven types of mutual funds where people can invest their money:

Money market funds

These funds invest in short-term income securities such as government bonds, treasury bills, commercial paper, banker’s acceptances and certificates of deposit. Money market fund has lower returns than other mutual funds available in the market. So, if one wants a speedy return on investment, money market funds do not guarantee such high returns, yet they are the safest investment option.

Examples-

• Aditya Birla Sun Life Floating Rate Fund by Aditya Birla sun life mutual fund – Short Term Plan
• Axis Liquid Fund by Axis Bank Mutual Fund.

Fixed Income Funds

They are used to buy investments which pay a fixed rate of return like government bonds, investment-grade corporate bonds, and high yielding bonds. These funds yield income regularly coming in from the interest accrued.

Examples-

• Public Provident Fund
• Punjab National Bank

Equity funds

Equity funds are solely focused on stocks. The return is better than money market funds or fixed income funds. Since it carries a higher risk, it is advisable to choose the wisest one. Equity funds are of several types-

• Growth Stocks
• Income funds
• Value funds
• Large-cap, mid-cap, and small-cap stocks

Examples-

• Reliance Smallcap Fund
• Kotak Select Focus Fund

Balanced funds

These funds have the perfect mixture of equities and fixed income securities. The objective of these funds is to generate high returns with minimum risk. To support this initiative, the balanced funds diversify their investments in different areas

Example-

• ICICI Prudential Balanced Advantage Fund
• SBI Magnum Balanced Fund

Index funds

These funds are developed keeping in mind any particular index. The value rises or falls in accordance with the index price. The index funds are of lower cost due to the minimal cost involved.

Example-

• Dow Jones Industrial Average
• Kotak Nifty EDF

Specialty funds

These funds invest in some predetermined areas like real estate, commodities or similar instruments.

Example-

• Dynamic Global Infrastructure Fund

Fund-of-funds

As the name suggests, these funds invest in other funds. They assess allocation and try to reduce risk like balanced funds.

Example-

• Alphinvest partners
• Abbott capital management

Also Read: Five Short Term Investment Schemes with Best Yields

Conclusion

Understanding the types of mutual funds may be very helpful to pick a fund which is best suited to your interests. From now on, whenever you come across any mutual fund scheme, try to figure out what type of fund it is. You must read, understand, do value research and then proceed to invest. Mutual fund investment is subject to market risk and discretion is advised to be followed.