Back to Blog
You may have heard of the term ‘Mutual Funds’ frequently over the last few years, but do you know exactly what they are?
Mutual Funds are investment platforms that pool money from different investors, and provide these investors with returns on the collected corpus over a period of time. This accumulated money pool is invested into the equity market by investment professionals, who are known as portfolio managers or fund managers. Fund managers invest your money into various forms of securities, like stocks, gold, bonds and other similar assets, which have the potential to provide satisfactory returns. These returns are then shared amongst the investors proportionate to their investment in the mutual fund.
While the crux of mutual fund investments is market returns, they can be classified into various segments, based on their investment goals, and other forms like structure and asset classes.
Classification on the basis of structure
Close-Ended Funds: Close ended funds are ones which are available for purchase only during an initial offer period. For the purpose of providing liquidity, these schemes are often listed for trade on the stock exchange. Close ended mutual funds need to be sold via the stock market at the prevailing price of the shares.
Open-Ended Funds: Open ended funds are those which can be purchased throughout the year. Open ended funds allow you to keep investing as long as you want, without any limits being imposed on the investment amount. Because of the active management these funds are subjected to, open ended funds charge a higher fee when compared to passively managed funds. Since they are not bound to a particular maturity date, open ended funds are the perfect choice if you are looking for liquidity.
Interval Funds: Interval funds are a combination of both open ended and close ended funds. These can be purchased at different time periods during the tenure of the fund. During this time, if you are a shareholder and wish to sell the shares, you can offload them to a fund management company that offers to repurchase the units from you.
Classification on the basis of asset class
Equity Funds: These are funds which provide high returns, but also come with high risk. Equity funds invest in company shares and are linked to the stock market, which is why returns may fluctuate.
Money Market Funds: Money Market funds invest in liquid instruments like Treasury Bills (T-Bills). They are moderately safe and good for you if you are looking to gain immediate returns. The risks associated with these kinds of funds are credit risks, reinvestment risks and interest risks.
Debt Funds: As implied by the name, Debt funds invest in company debt instruments like debentures, and other fixed income assets. They are safe investment platforms and deliver fixed returns.
Balanced or Hybrid Funds: These funds combine both equities and debts, however, the proportion invested in each varies between funds. Both the risk and returns are balanced out in a similar fashion. Investments are done in a mix of different asset classes.
Classification on the basis of investment goals
Income Funds: These funds are primarily used to invest in instruments providing a fixed income. The main motive of income funds is to provide you with a regular stream of income.
Growth Funds: Growth Funds primarily invest in the equity market with the aim of gaining revenue from capital appreciation. These are subject to market risks, and are beneficial if you are looking to make high returns on your investments.
Liquid Funds: These are very short term investments that provide you with high liquidity. While they are low risk investments, the returns from liquid funds are moderate, and good for you if you have short timelines.
Capital Protection Funds: Capital protection funds are invested in a split between equity markets and income instruments with a fixed return. The motive of making the split investment is to protect the principal amount invested by you.
Tax-Saving Funds: With high risk and high returns, these funds primarily invest the capital in equity shares, which qualify for deductions under the Income Tax Act.
Pension Funds: These funds have the aim of providing you with regular returns on your retirement after a long investment period. While they are mostly hybrid funds, they have low but stable future returns.
Fixed Maturity Funds: These funds invest in the debt market instruments which have a similar maturity period as the fund.
While it is definitely beneficial to be aware of the forms of mutual funds and align these with your financial goals, you should also know about the risks associated with each and consult your financial advisor before making any financial decisions.
