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A mutual fund is a way to pool money in a variety of underlying securities to pool money from investors for investment. In ratio to their investment amount, a mutual fund house issues unit of mutual funds to unitholders. The investment objectives of a mutual fund are revealed in the offer document. Profits or losses are proportionately distributed to the unitholders. Before it can collect funds from the public, mutual funds in India must be registered with the Securities and Exchange Board of India (SEBI).
Types of Mutual Funds in India
Mutual funds are categorised into several types based on their maturity period and investment objective. In India, mutual funds are categorised on basis on the type of underlying asset.
Equity schemes: These mutual funds provide capital appreciation for individuals who focus on medium- and long-term investment horizon. According to the Security and Exchange Board of India, equity mutual fund schemes should invest at least 65 per cent of the scheme’s assets in equities and equity-related instruments. These mutual funds are usually considered high-risk, as most of the investments are focused on equity products. These mutual fund schemes are best suited for those who are open to taking a market risk, and those looking for good returns over a long-term investment horizon.
Tax-Saving Funds: One of the most popular investment options which assist in efficient tax plannin are tax saving mutual funds, otherwise known as Equity Linked Savings Scheme or ELSS. The majority of the corpus in ELSS is invested in equity. ELSS has a mandatory lock-in period of 3 years. ELSS is the only pure equity investment that offers tax benefits up to RS 1.5 lakh in a financial year under Section 80C.
Aggressive Growth Funds: These mutual funds help you make tremendous returns from equity market investments. Using a beta tool, you can gauge the movement of the fund. This fund is, however, highly vulnerable to market volatility.
Debt schemes: If you’re someone who invests in debt mutual funds, chances are your money will be distributed in a variety of fixed income instruments such as government and corporate bonds, debt securities, as well as money market instruments. The units of the mutual fund have a fixed rate of interest which allows the investors to be aware of the returns right from the beginning. For investors who don’t want to take huge risks but want constant yields, it's an excellent investment alternative.
Open-Ended Funds: Open-ended mutual schemes are continuously available for subscription and repurchase. The important thing about open-ended mutual funds is that there is no set maturity period and investors have the choice of regularly buying and selling units at net asset value (NAV). The previous performance of these funds can be monitored, enabling the investor to make a well-informed choice. These funds are an excellent choice if the investor is looking for liquidity alone.
Close-Ended Funds: A closed-end fund works like a fund traded in exchange. A limited number of units are available for purchase in a close-ended mutual fund. During the New Fund Offer (NFO) period, the units of a closed mutual fund are available to the unitholders. The investors can trade the units on their NAVs at premiums or discounts. However, the redemption of these mutual funds is only permitted after the fund's maturity, which is typically between 3 to 7 years. These funds are a perfect choice for those investors who are not investing in short-term financial goals of a few months.
Growth Funds: Growth funds make up a large portion of the investment money in shares. This is a good option for investors who want to invest their surplus money and have a high risk appetite.
Income Funds: These mutual funds invest the investment amount in fixed income securities such as bonds, certificates of deposits and securities among others. It is a great option for risk-averse investors who have a few years of experience in investment.
Liquid Funds: These mutual funds invest in debt instruments and money market instruments with a short tenure of up to 91 days. Each investor is allowed to invest up to Rs 10 lakhs only. The NAV of the liquid fund is calculated for 365 days, whereas the NAV of other funds is calculated only on the basis of business days.