A mutual fund is a type of financial instrument that collects funds from various investors and invests them in diverse portfolios like stocks, shares, bonds, gold, etc. These funds are handled by professionals who distribute the money on behalf of the investors. Since this pool of funds is managed by experts, it is considered the best investment option for beginners.
If you are new, just knowing about mutual funds or SIP investments is not enough. You must dive deeper and learn about the numerous options available to you. Mutual funds are categorized based on asset class, investment goals, structure, and risk factors. Let’s learn a little more about each one of them.
Based on asset class
Financial assets that are similar in characteristics and behaviors are clubbed together in asset classes like stocks, bonds, or real estate.
- Equity Funds- Equity mutual funds include small-cap and large-cap investments in shares of companies.
- Debt Funds- They include government or corporate bonds, providing a stable income.
- Money Market Funds- These include short-term securities like treasury bills, which are low-risk in nature.
- Hybrid Funds- These mutual funds are a mixture of different types of assets which aim for stability.
Based on investment goals
Every investor has a different financial goal. To cater to the customers’ financial needs and provide them with a route that matches their goals, mutual funds are divided into the following funds.
- Growth Funds- These are investments in companies with high growth and are suited for long-term investors.
- Income Funds- These funds provide a steady income to the investors.
- Liquid Funds- These funds focus on liquidity for investors looking for minimal risk.
- Fixed Maturity Funds- These funds have predetermined maturity dates and provide fixed returns.
Based on structure
Mutual funds are also categorized on the basis of their structures. These structures include the way in which investors buy and sell the units.
- Open-ended Funds- They allow the investors to buy and sell units continuously providing high liquidity.
- Closed-ended Funds- These funds can only be bought during the initial offer period, have a fixed term maturity and limited number of units.
- Interval Funds- These funds are a mixture of closed and open-ended funds and provide a balance between long term investment and liquidity.
- Direct Funds- Direct mutual funds are bought directly from asset management companies and eliminate the intermediaries and their charges.
Based on risk
Every investor has a different risk-appetite. They can choose mutual funds based on the level of risk they can manage.
- Low-Risk Funds- Conservative investors can choose low-risk funds like government bonds and securities.
- Medium Risk Funds- These funds offer a balance between debt and equity investments, providing a reasonable level of risk.
- High Risk Funds- These funds are for investors seeking higher returns and willing to invest in high risk funds for capital appreciation.
- Index Funds- These mutual funds or ETFs are low cost investment options which track the performance of a market’s index.
Whether you want to invest in a regular, direct or quant mutual fund, learning about all their types based on asset class, investment goals, or risk will help you make informed decisions and avoid mistakes.