If you don’t have at least half of your money working for you, you are not accumulating wealth. Every earning individual should be aware of the 50:30:20 rule and follow it religiously. The 50:30:20 rule says that you can spend 50% of your monthly salary on your needs, 30% on your wants, and 20% of the remaining salary should be used to build an emergency fund. Now, it’s the 20% you should be careful about. This 20% should be invested properly. Mutual Funds are considered a good investment. Today, we will discuss types of mutual funds in detail.
Let’s get started.
What is a Mutual Fund?
A mutual fund is an investment fund which is professionally managed by experienced money managers. It pools money from various investors, like you, and put it into securities like bonds, stocks, money market instruments, and many other assets. The money managers decide how to divide and allocate funds to various securities.
Each investor for a mutual fund takes part proportionally in the gains and losses of the fund. The value or returns of investment in any fund depends on how various involved securities are performing in the market.
There are different types of mutual funds based on the types of assets involved, types of return one seeks, and more.
Types of Mutual Funds
As mentioned above, there are various types of mutual funds available for you to make an investment. You need to analyze your investment needs and make an informed decision when it comes to mutual funds.
CLASSIFICATION OF MUTUAL FUNDS
|Specialized Mutual Funds
Money Market Funds
Aggressive Growth Funds
Capital Protection Funds
Fixed Maturity Funds
|Very Low-Risk Funds
Index FundsFunds of FundsEmerging Market FundsInternational FundsGlobal FundsReal Estate Funds
Commodity Focused Stock Funds
Market Neutral Funds
Asset Allocation Funds
Open Ended Vs Close Ended Mutual Funds
Generally, you can classify mutual funds as open-ended and close-ended funds. Open-Ended Mutual Fund doesn’t come with a fixed maturity period whereas Close-Ended funds have a fixed maturity period. Therefore, you can redeem your gains from an Open-Ended fund any time you want.
A new fund may invest either in equity only or debt only, or a mix of both. Therefore, the classification of equity, debt, and hybrid still stands relevant. Equity Funds invest at least 65% of the fund in equity and equity-related instruments. Rest of the fund is invested in debt and money market. Whereas the debt funds are invested in fixed income instruments like government securities, bonds, treasury bills, commercial paper, and other money market instruments.
Hybrid Funds put money in combination of more than one asset class including equity, debt, and small part in gold.
Now, if we are specifically talking about the Indian money market, the classification of mutual funds as per SEBI is as follows:
Different types of mutual funds in India
On October 6, 2017, SEBI declared a new categorization of the mutual fund schemes. The types of mutual funds in India are as follows:
CATEGORIES OF MUTUAL FUND IN INDIA
|Large Cap Funds
Invests 80% of total assets in equity and equity-related of large-cap companiesLarge & Mid-Cap
35% in equity of large cap companies and 35% in equity of mid-cap companiesMid-Cap
65% of investment in mid-cap companies’ equitySmall-Cap
65% investment in equity of small-cap companiesMulti-Cap
65% in equity of large, mid, and small companiesValue Fund
Follows a value investment plan and 65% investment in equity
Dividend Yield Fund
Follows Equity Linked Saving Scheme of 2005 and invests 80% in equity. It is a tax-saving investment under 80C of the Income Tax Act, 1961.
securities with maturity of 1 dayLiquid Fund
Investment in debt and money market with maturity up to 91 daysUltra-Short Duration Fund
Investment in portfolios of 3-6 months durationLow Duration Fund
Investment in portfolios of 6-12 months durationMoney Market Fund
Invests in money market instruments – maturity up to 1 yearShort Duration Fund
Portfolio duration 1 – 3 years in debt and money market
Medium Duration Fund
Long Duration Fund
Credit Risk Fund
Banking and PSU Fund
Gilt Fund (10-year constant duration)
|Conservative Hybrid Fund
10-25% in equity, 75%-90% in debt and debt related instrumentsBalanced Hybrid Fund
Equal distribution between debt and equity instrumentsAggressive Hybrid Funds
65%-80% in equity and 20%-35% in debtDynamic Asset Allocation
Invests in dynamically managed debt and equity instrumentsMulti-Asset allocation
Invests in 3 asset classes with 10% in each asset classArbitrage Fund
This scheme follows an arbitrage strategy and invests 65% in equity
Other types of mutual funds are:
Solution Oriented Funds
- Retirement Fund
Lock in these schemes for at least 5 years or till the retirement age, whichever comes earlier.
- Children’s Fund
Has lock-in period of 5 years or matures when the child attains majority age, whichever comes earlier.
- Index Funds/ ETFs
Invests 95% of the total assets in securities of a certain index.
- FoFs (Domestic/Overseas)
95% of the total assets are invested in the underlying fund.
Remember that your returns for mutual funds won’t be consistent every year. Therefore, it is important to analyze your risk before the investment. It is considered a smart choice to divide your portfolio across different asset classes including equity, debt, and gold. If you are just starting out with investment, SIPs can turn out to be a good option for you. They help to create an investment discipline which is very important to accumulate wealth in the long run!
It is very easy to invest in these funds. There are various apps which help you invest in mutual funds by giving a comparative study of the returns and proper details of the fund. You can select a fund and make an online payment to invest in it. You can also activate the auto-debit option for every month. These apps also offer BHIM app or UPI as easy payment options.
And most importantly, always consult an expert in mutual fund investment before making any investment decision. Happy investing!