If you have not read part 1 of the article, I recommend you to go through it to get a holistic idea of the types of Mutual Funds. Please read Mutual Funds and their Types (Part 1)
While article 1 classifies mutual funds based on fund scheme and on the asset classes they invest in, Mutual funds could also be classified based on their investment objective.
Investors invest in mutual funds for different purposes. The purpose could be to leverage the high return in the equity market and earn quick profits. It could also be to ensure that one earns a regular source of income in addition to one’s salary.
Accordingly, and based on the investment objective, Mutual funds could be classified as below:
1. Growth Fund: The objective here is to provide higher returns to investors in the long term. Such funds normally invest in equity and other such instruments where the risk is high but so is the potential of return. As the name suggests, the “Growth Fund” looks to maximize growth and often invests even the dividends back into the fund. This increases the assets under management(AUM) of the fund and the potential of maximizing the returns. If your objective is not to gain immediate returns but to have a good corpus over a long term, growth funds are a great option.
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2. Dividend Funds: Such funds do not reinvest the dividend. They distribute it to the investors from time to time. Unlike growth funds, they do not seek to increase AUM using the dividend and hence the return over the longer term could be lesser as compared to growth funds.
3. Fixed Income Funds: These funds ensure that there is a regular income that the investor would get over time. They invest in schemes and instruments that are less risky. While such funds ensure a regular return/ dividend income, the probability of such funds giving a great return on investment in the long run is relatively much lesser than growth funds.
4. Balanced Funds: Balanced funds invest in both debt and equity and try to balance out the risks and the returns. If the investor has a little higher risk appetite than investing in fixed income funds but has apprehensions about the risk in equity, he could opt for a balanced fund to invest his money.
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5. Tax Saving Schemes: You might have often heard of Equity Linked Saving Schemes (ELSS) which offers a tax rebate to an investor. Here, if the investors stay invested in an ELSS Mutual Fund with a three-year lock-in period, he is eligible to claim a 100% tax rebate to the extent of his investment under section 80C of the Income Tax Act. The maximum amount that he can invest and claim a rebate for in INR 1.5 Lakhs.
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Mutual Funds could also be classified on the investment avenues they choose. While they are broadly debt or equity focused funds, they could further narrow their focus on specific areas. Such funds, often referred to as special funds, can be classified as below:
1. Sector Focused Funds: These are sector focused funds that invest all the money in stocks in a specific sector such as banking, technology etc. Such funds are riskier than the normal equity funds as they are prone to fluctuations based on policy changes, macro-economic decisions etc. that can impact such sectors.
2. Real -Estate Funds: These funds do not invest in real estate stocks. They invest directly in the real estate market. They buy or sell property, make their profits on such transactions and then pass the benefits to the investors in the fund.
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3. Index Funds: The Indices such as Sensex and Nifty are a barometer of the overall health of the Indian economy. The components of the Sensex and the Nifty are the top 30 and 50 stocks respectively based on market capitalization.
Index funds invest in stocks to the extent of their weightage in the Index – Sensex or Nifty. For example, TCS has a weightage of around 10.55% on the Sensex so the funds will also invest around the same percentage of its AUM into TCS.
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4. GILT Funds: Such funds focus on Government Securities which are considered very safe. Hence, the investment and a definite fixed return is assured. The flipside with such funds is that the rate of return would be very low, however, the risk is almost non-existent.
Now, that you are aware of the types of Mutual Funds and the advantages they offer, I recommend that you park your surplus funds into any of these based on your risk appetite and enjoy good returns.
Do ensure that your money also works as hard as you to enjoy a good, healthy and happy life!