A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.
Description: As an investor, you can buy mutual fund ‘units’, which basically represent your share of holdings in a particular scheme. These units can be purchased or redeemed as needed at the fund’s current net asset value (NAV). These NAVs keep fluctuating, according to the fund’s holdings. So, each investor participates proportionally in the gain or loss of the fund.
The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.
Types of Mutual Funds:-
Based on investment objectives, there are 7 types of mutual funds —
1. Equity funds
2. Debt funds
3. ELSS funds
4. Liquid funds
5. Balanced funds
6. Gilt funds
7. Exchange-traded funds
Based on the structure, there are 2 types of mutual funds one is close-ended and other is open-ended schemes.
You can start investing even with a small amount through mutual funds by means of Systematic Investment Plan (SIP).
SIP offers various flexibilities in terms of investing such as withdrawing amount at regular intervals and transferring funds from one mutual fund scheme to another. There are various types of mutual funds based on investment objective, flexibility and asset allocation.
1. Equity funds:
Equity funds invest anywhere between 65 to 100% of the corpus in equity. If you have a long term objective, you can invest in these funds.
2. Debt Funds:
Debt funds invest in bonds, government securities and money market instruments. If you want monthly income without much risk, you can choose debt funds.
3. Equity linked savings schemes (ELSS):
ELSS mainly invests in equities. These are tax saving schemes and have a lock in period of 3 years. You can get tax exemption of Rs. 1.5 lakh under Sec 80 C of the Income Tax Act. These funds give high returns if you stay invested for a longer time period.
4. Liquid Funds:
These invest in short term instruments like Commercial Paper, Certificates of Deposit, etc. and these funds help in capital preservation, easy liquidity and regular income. The maturity period of these funds can be less than 91 days. These are low risk instruments and least volatile as well due to their very short term maturity period. These funds are highly flexible as redemption can be done whenever the investor needs money.
Balanced funds are preferred by those investors who need a combination of income, capital appreciation and safety from their investments. These funds help to mitigate risk. Balanced funds invest both in equity and debt. There are 2 categories in case of balanced funds; a. equity oriented balanced funds b. debt oriented balanced funds.
Equity oriented balanced funds:
65% of the portfolio is invested in equities and the remaining in debt securities which helps in wealth creation over a longer time period. Long term capital gain in excess of Rs. 1 lakh will be taxed at 10% without indexation whereas short term capital gain will be taxed at 15%.
Debt oriented balanced funds:
Majority of the portion is invested in debt securities. Investment horizon of less than 3 years is taxed at 10% and more than 3 years is taxed at 20% with indexation benefit.
6. Gilt Funds:
These invest in government securities. Gilt funds are considered to be safer as these are mainly invested in government securities. You can prefer these funds if you are risk averse or a conservative investor. Your capital can be protected and no credit risk is involved. Hope this article gave you a quick glimpse of the different types of mutual funds in India.
7. Exchange-traded funds:-
Exchange traded funds are similar to index mutual funds. However, they trade just like stocks. It can trade them like stocks and the price of each unit of the ETF is not determined by the NAV but by the demand and supply in the market