by There are different types of mutual funds. Check out this post to learn some of the most popular mutual fund types with their brief features and select the right fund accordingly.
One of the best things about mutual funds is the sheer diversity they offer to an investor. You can choose from different types of mutual funds and start investing through SIP. For those who don’t know what is SIP investment, it stands for Systematic Investment Plan. SIP allows you to start investing in a mutual fund through small but regular investments.
However, before you begin your SIP investments, you must know some popular mutual fund types, as mentioned below.
7 Popular Types of Mutual Funds
Equity mutual funds invest primarily in stocks. As per SEBI rules, these funds must invest a minimum of 65% of their assets in equities and equity-related instruments. These funds can be further categorized based on the size of the company they invest in and their investment style.
Debt funds invest in fixed-income securities such as sovereign bonds, money market instruments, etc. The objective of debt funds is to provide income to investors, typically in the form of regular interest payments.
While debt funds typically may provide low return potential, they are also known to be less volatile compared to equity funds. Therefore, these funds can help investors potentially generate some returns (albeit lower than equity) but without the risks of equity instruments.
Hybrid funds are mutual funds that invest in a mix of equities, bonds, or money market instruments. The objective of hybrid funds is to balance risk and return potential for an investor by allocating funds to both equity and debt instruments.
Hybrid funds can be further classified based on asset allocation, such as equity-oriented or debt-oriented hybrid funds. These funds are suitable for investors looking for a balanced investment option that provides both growth potential and a source of income.
An index fund tracks a specific market index, such as the Nifty-50, BSE-100, etc., and tries to mimic the performance of that index. These funds invest in the same securities with similar weightage as the index they track. Index funds try to provide returns that match the performance of their underlying index instead of outperforming the index.
These are passive funds which means a fund manager doesn’t actively manage their portfolio. As a result, they tend to have a lower cost than an actively managed mutual fund.
Exchange-traded funds (ETFs) are traded just like equity on a stock exchange. They are designed to track the performance of a specific commodity or bonds or market index like index funds.
ETFs typically hold a basket of securities representative of the underlying index or sector.
A fund of funds (FOF) invests in other mutual funds rather than directly investing in stocks, bonds, or other securities. The purpose of a fund of funds is to offer investors a way to diversify their portfolios by investing in various underlying funds, each of which may have a different investment strategy and focus on different assets.
While ELSS is a type of equity fund, it deserves a separate mention. ELSS is a mutual fund in India that invests at least 80% of its assets in equity and equity-related securities. Under Section 80C of the income tax act, individuals can claim a tax deduction of up to INR 1.5 lakh per financial year for investments made in ELSS. The tax benefit is applicable under the old tax regime.
An ELSS comes with a 3-year lock-in period which is the shortest among all the other tax-saving options available to you.
Once you understand the various mutual fund types and their investment objectives, choosing the right fund for your financial goals can be easier. So, select the right fund, choose the SIP amount, and start investing right away.
