Types of Mutual Fund & How to choose the right Mutual Fund?
Mutual Funds are the recent and most attractive gateway for investment. This article contains all the insights about the same, including Types of Mutual Fund.
We aim to makes investments seamless for our readers. With the aid of increasing financial information, many people are making investments nowadays.
Earlier people used to keep money or their savings in piggy banks or somewhere in the almirah. But people no longer want to use this method in which returns are not increasing at all.
People believe in investing some amount of money instead of saving. They are now switched from piggy banks to Recurring Deposit (RD), Fixed Deposit (FD), funds, as well as equities.
Some people might fear the investment option and want to invest in someplace where they can fix and assure returns.
Such people choose bank deposits. But these deposits won’t provide returns the same as mutual funds.
Trends in Mutual Funds
The mutual funds are constantly arising. People are now becoming wise investors.
Being an investor means you are investing in a portion of the fund and you own units of your chosen funds for a specific amount of money.
The investment option which attracts most of the investors is equities. Since the equities make large profits, the risk is also more in this investment.
Moreover, if a person is investing in equity, he must do great research and should acquire enough knowledge before investing to get impressive returns.
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Types of Mutual Funds
There are many types of mutual funds in which anyone can invest with some requirements.
Before investing in any mutual funds you must have thorough knowledge about mutual funds and types of mutual funds as well as its benefits.
Divisions of types of mutual funds are done based on the following characteristics –
- Principal investments
- Maturity Period
- Special Mutual Funds
- Investment Goals
Principal Investments – Types of Mutual Funds
Here are the various types of mutual funds based on Principal Investments –
This fund mainly invests in stocks and therefore it is also called stock funds.
After getting money from various investors of different backgrounds, they invest this money in stocks and shares of varied companies.
One can expect good returns if the share performs well, meaning profits are only dependent on the increase and decrease of funds of a particular company.
Equity funds can create substantial returns and thus the risk is also very high when compared to other types of mutual funds.
This fund invests mainly in fixed salary safeties like securities, bills, and bonds.
Investing in debt funds means investing in several fixed earnings tools like Gilt Funds, Short-term plans, Long-term plans, Monthly income plans, Fixed Maturity Plans (FMPs), and Liquid Fund.
This is an amazing choice for investors who have a fixed source of regular income and who want to take lease risks. This fund has a fixed maturity date as well as a fixed interest rate.
This fund is a mixture of stocks and bonds. This is a balanced fund that fills the gaps between debt and equity funds.
The ratio of hybrid funds can be fixed or flexible which means it distributes the invested money into stocks and bonds in a ratio that is similar and sometimes dissimilar too.
This type of fund is reasonable for investors who can take more risks and don’t want to stick to just income plans.
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Maturity Period – Types of Mutual Funds
Here are various types of mutual funds based on Maturity Period –
In this way of funds, the unit capital which has to be invested is already formulated. Thus, the company cannot sell funds exceeding the decided amount of units.
In the New Fund Offer, there is a fixed duration to purchase units.
SEBI passed an order that investors should be given the choice to schedule the funds on stock exchanges to leave the scheme or buy again.
This kind of fund is not restricted to a fixed period and units which have to trade.
The investor when investing in open funds can trade funds at their amenity and also can leave when obliged at the prevailing Net Asset Value.
This is the main reason for repeatedly changing unit capital with entries and exits.
This fund has a combination of closed-ended as well as open-ended funds. During specific intervals, this fund can be unlocked only for withdrawal or purchase and is closed other times.
If invested in interval funds you are not allowed to make transactions for two years.
This type of mutual fund is adequate for investors who want to pile in a reasonable amount in just a short period.
Special Types of Mutual Funds
Here are some special type of mutual funds, lets have a look –
This fund comes under the category of specialized mutual funds. This fund is great if you want to secure the financial life of your loved ones.
This fund invests entirely in one particular sector. Since sector funds invest in only one particular sector the risk associated with fewer stocks is also very high.
To gain profits investors are informed to track different movements related to sectors. This fund also possesses remarkable returns.
The banking sectors and other IT, as well as pharma companies, have shown a huge increase in its performance and also the prediction of performing well in the future as well.
This fund invests money in an index. This specifies stocks and approximating ratio and invests money in the same fraction in related stocks.
This is considered as the option for passive investors. It is not managed by the fund manager. This fund is safe because it mimics the index action
Exchange Traded Funds
ETF can be traded in real-time at a rate that increases or decreases several times in a day. This fund lets the investor get exposure to stock markets of specialized sectors and abroad as well.
Foreign or International Funds
This fund is incredible for investors who want to spread their investment to other countries. The foreign mutual funds can bring huge returns to the investors.
The investor in this fund is free to apply a hybrid approach of the feeder approach.
Global funds are distinct from International Funds. A global fund investor can invest in the worldwide market as well as in their own country.
This fund focuses on foreign markets. This is the very diverse approach of mutual funds and thus it can be a little risky to own funds according to policies of the global market.
Real Estate Funds
Investors always find it difficult to invest in real estate because of its various risks.
And in this situation, a real estate fund can be an excellent choice since the investor will be indirectly related to real estate companies.
This fund reduces the risk and all the legal procedure annoyances.
Commodity Focused Stock Funds
Investors who have a risk appetite can invest in this fund. This fund allows an investor to tinker in various trades. The returns are solely based on commodity or stock company’s performance.
Mutual funds can invest directly in only gold commodities. Other commodities buy fund units.
These are the list of some of the most special Types of Mutual Fund.
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Types of Funds based on Investment Goals
Here are few mutual funds which are available or investment as per your investment goals.
This is a great option for all people. This lets you keep a fraction of your earnings in the pension fund for a longer period.
This can secure the financial life in the future of you as well as your family when you are retired from employment.
This kind of fund assigns a significant quantity of shares. This fund is right for investors who have available money to be allocated in riskier plans which will surely give higher returns.
Tax Saving Funds or ELSS
Equity Linked Saving Scheme has positioned itself in the top-ranking categories of investments. They offer a wealth maximization advantage while saving taxes.
Moreover, this fund enters with the shortest lock-in period i.e. of three years. This is suited for investors who have salaries and have a long term vision for investment.
Now, you know the various types of mutual funds available as per your investment goals.
How to choose the Right Mutual Fund?
Here are the various strategies or tips available which will help you choose the right Mutual Fund & its types.
Set Your Goals
There are various forms of mutual funds out there but for your needs and specifications, you need to pick the right option.
These goals and objectives are what define your investment in various asset classes.
You ought to bear in mind, as an investor, that if you intend to use the funds with long-term use, then the fund might be a long term capital appreciation.
These types of funds usually retain a high proportion of investors’ assets in common stocks. While this entails a reasonable amount of difficulty, these forms may be expected to yield decent returns.
On the other hand, an individual can buy shares in an income fund such as government or corporate debt if he wants existing additional profits.
These may be in the form of fixed deposits and recurring deposits.
If you have finalized the correct form of direct plan advisor and the timeline for yourself for the mutual fund, it is time to search for different sources that have such plans and offers.
Get in touch with a certified financial planner to gather this information quickly.
The Risk Factor
When investing in some form of asset, the most common risk and individual concern are losing money.
In reality, based on willingness to take risks, you can also arrange your mutual fund portfolio as per market capitalization bias and fund management style.
If you are unable to grasp the bias and investing style of the market cap adopted by the mutual fund system, you should know that everything is available in the offer document of the mutual fund scheme.
Past Performance and Result
In analyzing a mutual fund, the previous statistics of a mutual fund scheme is vital.
But note that since it can or may not be replicated in the future, past success is not everything and should therefore not be the only criterion for choosing winning mutual funds.
So as an investor, you must also take note of the risk which they have exposed you to, the portfolio they have kept and its attributes, and how much the fund has brought to its portfolio, must also be weighed.
The role of the fund manager is essential in a mutual fund. Every time he trades his portfolio, he pays a trading fee which is essentially payable by investors in the form of an expense ratio.
Costs are still there and are debited, but like all investors, dividends and a better NAV are wished for.
We would advise you to pick a mutual fund scheme that, relative to its peers, has a low expense ratio. Also, while investing it is important to look into the little details.
You have to assess whether fund houses and the mutual fund scheme adopts good closure norms so that you are confident enough to make a decision.
Another thing that investors need to bear in mind before investing is the tax consequences while making decisions.
Mutual funds are very tax-friendly in this respect. However, the taxes you pay is heavily dependent on the types of funds that interest you.
Other factors that affect taxes are the period of your investment. Like for example, in a financial year, the long-term capital gain from an equity mutual fund is now taxable at 10% over 1 lakh.
On the other hand, the short-term capital gain carries the 15% percent tax.
You have to dig down a little bit deep when you are considering buying a mutual fund to investigate the kind of holdings that power it, how much it costs, which agent will help you push it, and its past results.
Some investors only consider the star ratings by different research agencies.
These ratings can be one of the factors to look at, but there are many other parameters that one should look into before finalizing a mutual fund portfolio.
Yet choosing the best scheme for mutual funds does not necessarily mean the best returns. It could be best in terms that suit your profit and goals.
Types of Mutual Funds – Conclusion
Mutual funds provide outstanding investment choice because it gives access to huge possession. Several different types of mutual funds give amazing returns.
Investing in mutual funds can be risky but with adequate knowledge about the market and all kinds of mutual funds, taking risks is worth it.
Choose the type which suits your situation the most and start investing in mutual funds because it is a way to acquire more assets.
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