Mutual Fund Basics - Part II (Types of Mutual Funds)

In the First Part, I explained about what is mutual funds and their advantages and disadvantages. In this part I am going to explain the basic types of mutual funds. Mutual funds can be categories according to Maturity Period or Investment Objective.

Mutual Funds according to Maturity Period

Based on the maturity period mutual fund schemes can be categories into two types

 1. Open Ended Mutual Funds         

An open ended mutual fund is one that is available to purchase and repurchase continuously. Liquidity is the main feature of open ended mutual funds. There is no maturity date for open ended mutual funds. Investors can buy or sell unit at any time based on NAV which is declared on a daily basis.

2. Close Ended Mutual Funds 

A close ended mutual fund is one which is available to purchase for a limited time period at the time of launch. Investors can invest at the time of public offer and thereafter they can cell and purchase units from stock exchange where it is listed. Mutual fund units can be selling back to fund house if this option is provided to the investors. It is mandatory for close ended schemes to provide selling options either by listing unit to stock exchange or using selling back. NAV of close ended schemes declared generally weekly basis.

Mutual Funds according to Investment Objective

Based on investment objective mutual funds can be categories in six types

1. Equity Mutual Funds 

An equity type mutual fund provides capital appreciation over the long term. Equity mutual funds invests mainly in equities hence they carries high risk. Equity mutual funds come with different options like growth option, a dividend option etc. The investor has to choose either option at the time of the subscription or purchase. Equity Mutual Fund is suitable for the investors who are seeking long term of appreciation of their investment.

2. Debt Mutual Funds 

A debt type mutual fund provides regular and steady income to investors. Debt type mutual fund invests in Government Securities, Bonds, Money Market Investments, Corporate FD etc to generate regular and steady income for investors. The debt mutual fund carries less risk as compared to equity mutual funds. Capital appreciation is limited in debt funds.

3. Balanced Mutual Funds 

A balance mutual fund provides growth and regular income to investors. The balanced mutual fund invests in equities for growth and in debt instruments for steady income. Generally balanced mutual funds will be having 40% equities and 60% debt instruments in their portfolios.

4. Gilt Mutual Funds 

A gilt mutual fund invests exclusively in government securities. The NAV of a gilt fund fluctuates due to changes in interest rates and other economic conditions of the country.

5. Liquid Mutual Funds 

A liquid mutual fund provides easy liquidity and preservation of capital. Liquid fund also called income fund or money market funds. Liquid funds are a safer investment for shorter periods with less appreciation of capital. These types of funds are suitable for investors who want to park their surplus for shorter durations and want high liquidity.

6. Index Mutual Funds 

Index mutual fund replicates the portfolio of a particular index (i.e. S&P NSE 50) and invests in the securities with the same weightage comprising of an index. NAV of Index mutual fund changes as per the changes of the index.

In the next blog I will try to explain the general terms used in mutual funds (i.e. Entry Load, Exit Load, NAV, Portfolio etc.)