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Everything you need to know about types of mutual funds

Do you know what Mutual Funds are? If yes then it is time for you to understand what types of mutual funds are available to you. It is essential, because it will allow you to choose the best alternative and ultimately enable you to diversify.

If you are interested in Mutual Funds​​ and try to find out what all schemes are available under them, then you will surely be baffled. There are innumerable fund schemes to choose from for the investor, hence a wise decision must be made.

Mutual Funds can be broadly categorized on the basis on investment asset class.

  • Equities (or Stocks): these represent the largest category of mutual funds. These are the funds that invest in equity markets. They can be further categorised into :
    • Large Cap: Large-cap funds are the ones, which invest in companies that are well-established. Their stock prices are least volatile; hence
      they are least risky funds.
    • Medium and Small Cap​: These funds invest in small and medium-sized companies operating in uncertain markets. If the economy is
      growing they can earn better returns, but are more risky than large-cap companies.
    • Sectoral Funds: Funds that invest in specific sectors, which may include infrastructure, FMCG etc. They are the riskiest of all as portfolios
      are concentrated in one sector only.
  • Fixed Income (Bonds): These are the funds that invest in bond markets like Debentures, Government securities etc. They follow the simple concept of borrowing to the large corporations.
  • Money Market Funds: Funds that invest in Money markets which consists of short-term debt instruments like Treasury bills, Commercial paper etc. They mostly have low risks and low returns.

Some other related fund types are:

  • Index Funds: Funds that invest in all the stocks that comprise an “Index” such as the BSE Sensex or S&P Nifty. The investment proportion is exactly the same in all of them. These utilize a passive investment strategy because the investment style does not involve active stock selection.
  • Quant Funds: Funds that use Quantitative methods to select stocks rather than researching the underlying business of the company.
    Here’s a classification based on how you can invest in them:
    • Closed-End Funds: A closed-end fund allows the investors to enter only when the scheme is announced and mature when the scheme ends. Hence, it has a fixed duration (generally ranging from 3 to 15 years). Closed-end funds can be traded as any other stock when they are listed
      on exchange, or can be traded OTC (over the counter)
    • Open-End Funds: An open-end fund is one that is available for subscription / redemption throughout the year. In other words, it permits
      investors to invest and withdraw at any time.

When classifying them based on the mode of income received, then they are:

  • Dividend plans which offer a return to the investor in the form of dividends.
  • The other type is the Growth plans, which allows you to keep your money invested until you withdraw it.

When categorizing funds on the basis of plans or schemes, they are:

  • Regular Plans involve funds that introduce intermediaries, which provide additional services like financial advice etc. They have higher costs involved.
  • Direct Plans are purchased directly from the AMC and have lower transaction costs, because of the exclusion of the intermediaries.

Disclaimers
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Certain factual and statistical information (historical as well as projected) pertaining to Industry and markets have been obtained from independent third-party sources, which are deemed to be reliable. It may be noted that since RNLAM has not independently verified the accuracy or authenticity of such information or data, or for that matter the reasonableness of the assumptions upon which such data and information has been processed or arrived at; RNLAM does not in any manner assures the accuracy or authenticity of such data and information. Some of the statements & assertions contained in these materials may reflect RNL​AM’s views or opinions, which in turn may have been formed on the basis of such data or information.

Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision. None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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