Mutual funds are one of the most popular types of investments in India. As the name suggests, mutual funds are pooled investments where investors pool their money together in order to invest into different investment tools. To invest in a mutual fund, a mutual fund manager is appointed who allocates the investor’s money in a way that satisfies their goals and helps them gain profits.
In India, the Securities and Exchange Board of India (SEBI) has classified mutual funds into four categories- Equity- based, Debt- based, Hybrid and Solution-oriented schemes.
Equity- based schemes- These are the schemes that are focused on equity investments and are most suitable for the long- term goals of the investor. Since the major proportions of funds here are invested in equities, the risk is high but so are the returns.
Debt- based schemes-Unlike equity-based schemes, debt- based schemes are safer investments since these are inclined towards investing in Fixed Income Instruments which provide fixed returns to the investor. These are more suitable for short- term goals of the investor but can also be used for the long- term.
Hybrid schemes- Hybrid schemes comprise of both equity and debt instruments, which enables the investor to earn the fixed interest through debt instruments as well as the potential abnormal profits through investment in equities. This allows the investor to diversify the risks and thereby earn higher profits
Solution- oriented schemes- These are the schemes that focus on a specific goal of the investor; long-term or short-term, be it the education of a child, retirement fund, desire to buy a car, planning vacation, etc
These schemes can be further divided into six major types of mutual funds in India: Money market funds, balanced funds, equity funds, fixed income funds, specialty funds and index funds.
Money Market Funds- These are the investments that are safer as compared to the other mutual funds while the investors bear very minimal risk. Since the risk involved is low, the potential return on the investment is also less, therefore it is suitable for investors who are risk averse and are satisfied with a stagnant return on their investment. Money market securities include fixed income securities like Treasury bills (T-bills), government bonds, Certificates of Deposit (CDs), etc.
Balanced Funds- Balanced funds cater to the category of investors who are looking towards diversifying their investments by putting their money into both fixed income securities as well as equities. These investors earn returns through equity investments along with a fixed return through debt instruments, which lowers the high risk involved in pure equity investment. Although the risk in balanced funds is higher than that in fixed income funds, it is still lower than that in equities.
Equity Funds- These are focused on investment in equities, i.e. investing in the stock market, and therefore carry high risk. This is because it caters the set of investors who are aiming to grow their investment at a fast pace and are willing to take risks.
Fixed Income Funds- These funds are suitable for risk averse investors who are aiming to earn a fixed amount of return every year. Fixed Income funds comprise of investments into government bonds, corporate bonds, etc.
Specialty Funds- People who are longing to be real-estate moguls for a very long time, their dream can be achieved by investing in specialty funds. These funds are specially focused on real estate, commodities or other socially responsible investment. It is said that a socially responsible investor may invest in those set of companies which support environmental stewardship, human rights and diversity. These shareholders are generally known for avoiding the companies that are into manufacturing of alcohol, tobacco, weapons or are into gambling.
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Index Funds- These are the set of categorized mutual funds which have lower costs as portfolio managers do not need to do much research while convincing the shareholder to invest in these shares. Just like the value of mutual funds inclines and declines with time, the value of index funds can go up or down in a similar manner. The main objective of these funds is to record the performance of definite index like S and P/TSX Composite Index.
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