INVESTMENT GUIDE SERIES: PART 2 BASIC KNOWLEDGE OF INVESTING IN MUTUAL FUNDS

TYPES OF MUTUAL FUNDS

IN PART OF THE SERIES WE HAVE ALREADY SHARED information about the basic concept of mutual funds and basic precautions that should be taken by the investors while investing their earnings or funds in mutual funds. The popularity of mutual funds  is increasing day by day. In present time, investing in mutual funds has evolved as a new avenue for investing funds where investors can earn a handsome earnings with lesser risk. We are doing a sincere effort to make our readers aware about various aspects of investing in mutual funds. So, here in this Investment Guide Series, Part -2, we are discussing about types of mutual funds.

Classification of mutual funds may be done on various basis or criteria. It may be based upon asset class, time of entry for retail investors or type of returns from Mutual fund managing companies.

Based on Asset class:  This classification of mutual fund is done on the basis of investment/securities or assets where the pooled funds of the participants are invested.

(a) Equity funds: if the funds are invested in Equity stocks/shares then such mutual funds are called equity funds. Equity funds are considered risky and as per the rule of economics (more risk, more profit) also  give more profit.

Although equity funds are not as risky as investing funds directly in Equities, yet risk involvement is high in comparison to debt funds.

(b)  Debt funds: Mutual fund in which money is invested in bonds, government securities, and other securities where risk is less as per the rule of economics (less risk less profit) returns are also less.

(c) Hybrid or balanced funds: In balanced or Hybrid funds, the pool funds are invested in a mix proportion of equity and debts. In case of hybrid or balanced funds the risk is lesser than equity funds and the returns are higher than debt funds.

(d) Money market fund: Pooled funds are invested in liquid investments or the assets which may be converted to money at a short call.
Example: Commercial Papers (CP).

(e)  Indexed Fund: Indexed Fund invest money in index like BSE, Nifty or the shares which represent a particular index like the shares which represent Nifty.

(f) Sector funds: These funds invest in a particular sector financial assets. For example: A banking sector fund would invest its funds mainly in banking companies' instruments. Return on investment or risk both mainly depend upon the performance of that particular sector in economy.

CLASSIFICATION BASED ON THE TIME OF ENTRY IN THE FUND :

Based upon entry timing in the fund, Mutual funds are classified mainly into two parts.

1) Open ended funds: In case of open ended funds, investors can purchase or redeem their units at any time during the year at the value on that particular time. So, these funds provide more liquidity to their investors.

2) Close ended funds:  In close ended mutual funds the purchase of units can be done by the investors during a fixed period at the time of creating or initiating that particular fund. The redemption of units can also be done at a specific maturity date, no sale/ purchase of units is directly done by these mutual funds. But these mutual fund schemes are usually exchange traded which means the units of these funds may be sold on stock exchange to other willing investors.

CLASSIFICATION BASED ON TYPE OF RETURN

1) Growth funds: These mutual funds focus on fast and steep growth of the invested funds. Normally these funds invest the pooled money in equities. Generally, high growth is associated with high risk and same economic law applies to growth funds also.

2) Income funds: This type of mutual funds promise a fixed income to investors on their money invested. To keep their promise these funds invest the pooled money in fixed income instruments like debentures, bonds etc. Here the investors get regular income which is nearly in a fixed range. The income potential is much lower in comparison to growth funds but at the same time the associated risk is also low. Rate of interest and inflation rate are the major factors which affect the performance of income funds. As we do not witness very steep changes in the rate of interest within a very short period, so the variation in the income of these funds is also generally range bound.

Balanced funds: these are a mix of growth funds and income funds, where a part of the investor's pooled money is invested in equities and the other part is invested in fixed income instruments. These funds offer a moderate return which is associated with moderate risk.Investing in mutual funds is considered to be less risky and more beneficial for investors.

Attributes like professional management, availability of various options for diversification, availability of tax deduction make mutual funds attractive for investors. The investments may be done in small amounts which make mutual funds affordable for small investors also. Units of mutual funds may be redeemed anytime and the investment maybe converted to liquid funds in a very short time period. Liquidity is also a very important attribute of investing in mutual funds. Safety and transparency are also important issues for investors of mutual funds which have also been addressed as in India mutual funds are regulated by Securities and Exchange Board of India (SEBI). There is a continuous monitoring mechanism, even then the investors are advised to be cautious and monitor the performance of funds on timely basis.