What are the types of mutual funds and their benefits?
When you look to invest in a mutual fund, you either go for open-ended or close-ended schemes. There are many more categories to it.
Do you also wish to know what the types of mutual funds and their benefits are? You have already read our article on what mutual funds are and how they work. This article would acknowledge the types and their benefits.
When you look to invest in a mutual fund, you either go for open-ended or close-ended schemes. An open-ended scheme lets you enter or exit throughout the year at the NAV. Any number of units can be brought in such a scheme. This scheme does not have a fixed maturity period and is flexible for those who require liquidity.
A close-ended scheme has a fixed maturity scheme which means you can only buy a scheme during the entitled period known as the NFO (New Fund Offer).
Before we elaborate on the types of mutual funds and their benefits, let’s have a look at the meanings of some important terms used in this article:
Liquidity: It refers to the ease with which security or an asset can be converted into cash at market price.
Maturity Rate: It refers to the time a bond is due and is paid back to the investor.
Inflation: It means the increase in prices with a decrease in the value of money.
Types of mutual funds and their benefits
These are the two questions that are posed while looking for mutual funds - How many types of mutual funds are there in India and what are the benefits of investing in mutual funds. Well, to be concise, there are many types categorized under asset class and investment goal. Everyone might differ in their financial objectives and also in the assets they invest in.
Categorized on the assets invested in the mutual funds, the 4 types of mutual funds are:
1. Equity fund schemes - This allows participation in stock markets where there is a high return potential. This is ideal for investors who are in their foremost earning stage. These are very low on pockets with investing as low as Rs. 500 and having market experts (AMC/Fund managers) doing your research and work.
2. Debt fund schemes - These let investors invest money into fixed-income schemes like corporate bonds, treasury bills, and others. They offer great stability, with low risk and low return policy. The investors would receive a stable income with high liquidity and also the benefit of the transfer of funds.
3. Hybrid funds - Investment in both equity and debt to balance them out is very beneficial for investors for there is an equal balance between risk and returns. First-time investors should straightaway look for these, for exposure to equity through hybrid fund would be a lot easier.
4. Balanced funds - This scheme lessens the risk rate, by providing a low potential risk safety. You get protected from inflation rates and provided a safe cushion against issues rising from risk rates and asset allocation.
Categorized on the basis of investment goals, the 3 types of mutual funds are:
1. Growth funds - Only invested with the aim of capital appreciation in high-performing stocks is what comes as a part of growth funds. This would be beneficial for you because there is potential for high returns.
2. Tax saving funds - The amount invested in this fund has the potential to tax deduction under Section 80C of the Income Tax Act. The returns range from 15-20% which proves safe and transparent investing.
3. Fixed Maturity funds - Investors can invest in fixed income instruments like deposits or bonds to cancel the fluctuation in the interest rate that debt markets actually face. The benefits that you get are that you can avail of minimal interest rate risk and is of low risk and low tax as well.
Knowing about mutual funds is easy when you have sources for the same. This article has covered two questions - how many types of mutual funds are there in India and what are the benefits of investing in mutual funds. We hope that this article proves useful to you.