Mutual funds are the kind of funds that offer the borrower the most comprehensive, flexible, and easy ways of creating a diversified portfolio of investments. Having said that, to help the borrower invest in the right fund, it is very important to be well aware of the different kinds available to help initiate their investment.
To help make the right decision, we have curated this article that includes the different types of mutual funds that are available in the market space and will help you make an informed decision in investment. Towards the end, we also explain the benefits of using a SIP return calculator to easily calculate your SIP gains!
8 Types Of Mutual Funds To Start Investing
Without wasting any time, let’s cut to the chase and straight head over to the kinds of mutual funds available to start investing:
1. Open-Ended Funds
As the name gives it out, in an open-ended mutual fund an investor is allowed to invest/enter/redeem/or exit the plan at any given time. This means this mutual fund does not have to be for a fixed period of time or the maturity period.
2. Close-Ended Funds
On the contrary to open-ended mutual funds, a close-ended mutual fund has a fixed maturity date until which an investor is expected to invest. Having said that, an investor can only initiate their investment in these schemes during the NFO or New Fund Offer period. After which, the amount automatically gets redeemed on the maturity date which is listed on the stock exchange(s).
3. Equity or Growth Schemes
These kinds of mutual funds are quite popular schemes that allow investors to participate in stock markets. Although these equity schemes are categorized as high risk, they also have a high potential of return in the long run.
These are best invested in by investors, especially in their stage of prime earning, or to help build a portfolio that provides superior returns over the long term. These are further divided into three sub-categories:
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Sector-Specific Funds
In this mutual fund, the investor invests in a specific sector, such as infrastructure, mining, banking, etc, or even in specific segments like the mid-cap, small-cap, or large-cap that are suitable for investors that have a high-risk appetite with high potential returns.
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Index Funds
These mutual funds are ideal for investors who wish to invest in equity mutual funds but, at the same time, don’t wish to depend on the fund manager. Here, the fund follows the same strategy as per the index.
For instance – if the index fund is following the BSE Index for the replicating index with a 20% weightage, then the index fund would also be 20% of its assets.
In an index fund, the returns are promised in line with the mirroring index. Adding to this, the loss is also limited to the proportional followed loss that makes it best suited for investors with a medium risk appetite.
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Tax Saving funds
As the title says, a tax saving fund is a kind of mutual fund that offers tax benefits to investors. And since they are invested in equities, they are also called Equity Linked Saving Schemes or ELSS that have a 3 year lock-in period.
4. Liquid Funds or Money Market Funds
These are short-term mutual funds that are best for investors who are looking to invest in short-term debt instruments with a reasonable return. A liquid fund is best for low-risk investors or those who are in search of parking their surplus funds in a short term. Having said that, these are the best alternatives to debiting money in a savings bank account.
5. Fixed Income or Debt Mutual Fund
Here, the investment is majorly made in debt – fixed income, or the fixed coupon-bearing instruments. These include government securities, debentures, bonds, etc. In a fixed income, the system has a low-risk-low-return outlook, is ideal for investors with a low-risk appetite, and, on the downside, is subject to credit risk. Using a SIP return calculator can further help lower your risk and offer more clarity on your intended investments.
6. Balanced Funds
In other words, they are mutual fund schemes, which divide their investments between debt and equity. Although the allocation could change as per the market risks, they are best for investors looking for a combination of moderate returns with low-risk capacity.
7. Hybrid / Monthly Income Plans or MIP
Although similar to the balanced mutual funds, these hybrid funds have low equity assets as compared to the balanced funds. Therefore, these are also known as the marginal equity funds, best suited for retired investors and those with comparatively low-risk appetites.
8. Gilt Funds
Gilt funds only invest in government securities. This is why they are best preferred by investors with risk-averse and no credit risk with the investment. Nevertheless, these are subject to high-interest rate risk.
Want help with making small investments in mutual funds? You can simplify the math that goes behind SIP return calculation by simply using a SIP return calculator!
Wondering how a SIP return calculator works? To put it simply, a SIP return calculator or a mutual fund calculator operates on the formula-
M = P × ({[1 + i]n – 1} / i) × (1 + i) wherein-
- M is the amount received upon maturity
- P, the amount invested at regular intervals
- n is the number of payments one has made
- I, the periodic rate of interest on the fund
A SIP return calculator is a tool that provides a rough idea of the mutual fund returns by roughly estimating the maturity amount for a monthly SIP, based on a projected annual return rate. It must be noted that the rate of interest differs as per the market conditions and hence, any change in the rate will directly result in changes in the estimated returns
To Conclude:
We hope that the article above has helped you have a better understanding of the multiple options of mutual funds available in the market. It is a good practice to first do your research to understand the aspects of the mutual fund in question, and also be aware of the returns.
Make sure to also be well aware of how much your pocket allows you to invest in the mutual fund and what is your risk appetite. Knowing small yet necessary things like this can help you make the right decision.
FAQs: 8 Types of Mutual Funds to Start Investing
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What are money market funds?
These are short-term mutual funds that are best for investors who are looking to invest in short-term debt instruments with a reasonable return. A liquid fund is best for low-risk investors or those who are in search of parking their surplus funds in a short term. Having said that, these are the best alternatives to debiting money in a savings bank account.
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What is a SIP return calculator?
A SIP return calculator, as the word suggests is a tool that provides any seeking individual with an idea of the mutual fund returns, that is made through SIP. However, a SIP return calculator roughly estimates the maturity amount for any monthly SIP, based on a projected annual return rate.
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Are hybrid mutual funds the same as balanced funds?
Mostly, yes! However, although similar to the balanced mutual funds, these hybrid funds have low equity assets as compared to the balanced funds.
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How to choose a good mutual fund?
On the surface, if the goal is negotiable but has a short-term investment plan, then the best mutual fund option could be a balanced fund. Moving forward, once you are aware of the kind of mutual fund you wish to invest in – be it equity, debt, or balanced – choose a fund with a long history over different market cycles.
