Broadly, a mutual fund scheme invests in debt, equity or a mix of both. These can be further divided into open-ended or close-ended mutual fund schemes. You can both invest and exit open-ended schemes at any point of time as it doesn’t have a fixed maturity period, while close-ended funds have a fixed maturity date. Investors can only enter during the initial period known as New Fund Offer or NFO period. Close-ended funds are listed on the stock exchange.
Here is a quick overview of various mutual fund schemes amongst others:
- Equity schemes that invest directly in the stock market, and hence fall under the moderate high-risk, potential long term high-returns category. These are ideal for an investor who is looking for a long-term investment.
Within equity, there are sector-specific funds that typically invest in a specific sector like banking, infrastructure or specific market segments such as large cap, mid cap or small cap. Index funds or ETFs are type of equity funds which aims to replicate the benchmark index such as Nifty, Sensex and are traded on stock exchange. Tax-saving funds (ELSS) are type of equity funds that offers tax benefits to investors and subject to a lock-in period.
- Liquid funds or money market funds invest in short-term debt instruments, and are suitable if you’re looking to park your money for a short duration in order to earn commensurate returns. Typically, investors consider these funds as an alternative to a savings bank account.
- Debt or fixed income schemes invest a large portion of their money in fixed income instruments such as government securities, bonds, debentures etc. They are a viable option for investors with a moderate risk appetite, looking for a regular income. They are subject to interest rate risk, inflation risk and credit risk
- Balanced funds, as the name suggests, are a blend of equity and debt. The allocation typically changes depending on the market situation and risks. You could consider these funds when you’re willing to undertake a moderately high risk for moderate returns and are aiming to diversify your portfolio according to market fluctuations.
- Gilt Funds are funds that only invest in government securities. Mostly preferred by investors with lower risk appetite and do not wish to be exposed to credit risk. However, these schemes are highly subject to interest rate risks.
-Monthly Income Plans (MIP) is a type of hybrid fund that seeks to declare a dividend every month but there is no guarantee that the dividend will be paid every month.
- Arbitrage funds take position in different markets or securities, and aiming that the risk is neutralized but return is earned. These are designed to help investors to take positions or protect their risk in some security.
- Fund of Funds (FOF) is a mutual fund scheme that invests in other mutual funds. Investors basically diversify their portfolio and benefit of investing in various mutual fund schemes through one scheme, thereby, also reducing overall expenses. However, the investor has to also bear expenses of the underlying schemes.
Choosing the right mutual fund should always be based on your financial goals, investment horizon and the risk you are willing to undertake.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.