February 27, 2024

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Learn about mutual fund types and how are they priced

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mutual fund types
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Opting for mutual funds is a savvy strategy to gradually expand your wealth. Such funds have distinct benefits attached such as high flexibility, simple investment processes and diversification. Currently, there are over 44 registered mutual funds, each providing distinct schemes to mitigate the diverse requirements of retail investors. Read on to understand the mutual fund types and categories based on which they can be divided –

Structure of mutual funds –

Close-ended funds

These funds have a predetermined capital amount and only allow purchase during a specified period. Investors need to hold onto their units until the maturity date, but they can trade their units on stock exchanges to access liquidity.

Open-ended funds

These funds are designed for flexibility. Investors can buy or sell units at any time, as the fund continuously issues and redeems units. This makes them ideal for those seeking liquidity and the freedom to enter or exit investments whenever needed.

Mutual fund asset class –

Debt funds

These funds invest in fixed-income securities such as bonds and government securities. They provide stability and regular income with lower risk compared to equity funds. Depending on the duration of the underlying assets, they can be grouped as low-duration funds, liquid funds, credit risk funds, and more.

Equity funds

These funds invest in company shares and their performance is tied to the stock market’s ups and downs. While they can generate high returns, they even hold higher risk. Equity mutual funds can further be divided depending on the companies’ size they invest in, such as small-cap, mid-cap, large-cap, and others.

Hybrid funds

These funds strike a balance between debt and equity investments to manage risk and return. Depending on the fund’s strategy, they can have fixed or varying ratios for each asset class. Balanced and aggressive funds fall under this category.

Solution-oriented funds

Designed for specific goals such as education or retirement planning, these funds have a lock-in period of at least five years.

Other funds

Index funds track specific market indices, while fund of funds invests in other mutual funds.

Mutual funds based on investment goals –

Growth funds

These funds aim for capital appreciation by investing in high-performing stocks. They suit long-term investors looking for substantial returns.

Tax-saving Funds (ELSS)

ELSS (equity-linked saving schemes) offer tax deductions under Section 80C. They require a minimum investment horizon of three years.

Liquidity-based funds

Some funds prioritise liquidity. Ultra-short-term and liquid funds are suitable for short-term goals, while retirement funds lock in your investment for the long term.

Capital protection funds

These funds partially invest in fixed income and equity to minimise losses. However, gains are taxable.

Fixed-maturity funds (FMF)

These funds align with specific maturity periods, investing in debt market instruments with matching maturities.

Pension funds

Geared towards providing regular returns after an extended investment period, these funds usually have a mix of debt and equity.

Risk appetite –

Investors should also consider their risk tolerance. Very-low-risk and low-risk funds aim to mitigate market risks, yielding lower returns. These include ultra-short duration or liquid funds. Medium-risk funds, like hybrid mutual funds, balance risk and reward, while high-risk funds focus on equity exposure, potentially offering higher returns.

How are mutual funds priced?

It is essential to remember that the expense ratio is a vital aspect of investing in mutual funds. This ratio involves administrative expenses, management fees and other expenditures incurred by the scheme. A lower expense ratio can mean higher returns for investors, making it essential to consider this factor when choosing funds.

Conclusion

Being aware of the distinct kinds of mutual funds as well as their pricing mechanisms can permit retail investors to make better decisions in alignment with their life goals. Whether you are looking for tax savings, stability or growth, there is probably a mutual fund designed to match your preferences and needs. Also, you must utilise online tools like SIP calculators to plan your investments wisely and maximise your returns.

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