Types of Mutual Funds: 31+ Different Types (+ Quick Guide)

Types of Mutual Funds
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Contrary to what you were led to believe over the years, there are way over 4 types of mutual funds out there. In fact, they are several of them which led to further categorizing them based on certain factors. These factors include risks, investment goals, structure, and so on. So shortly we will go through the different types of mutual funds out there, getting you acquainted with every one of them. Mind you, some of them may appear in more than one category.

Hence diving in, the following are the different types of Mutual funds out there in five categories, beyond the conventional 4.

Types of Mutual Funds
Image Source: GillBroking (4 Types of Mutual Funds)

Types of Mutual Funds on the Asset Class Basis 

The following are the 4 types of mutual funds under the asset class category. And with the information here, it shouldn’t be a problem getting acquainted with them.

#1. Equity Funds

Since equity funds mainly invest in stocks, they are also known as stock funds. They invest the money raised by a variety of investors with diverse backgrounds in various companies’ shares/stocks. The gains and losses associated with these funds are solely determined by how the invested shares perform in the stock market.  Furthermore, over time, equity funds have the ability to produce large returns. As a result, the risk associated with these funds is typically higher.

#2. Debt Funds

Debt funds mainly invest in fixed-income instruments like bonds, stocks, and Treasury bills. They invest in Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds, and Monthly Income Plans, among other fixed-income instruments. 
Since the investments have a set interest rate and maturity date, they can be a good choice for passive investors looking for consistent income with low risk.

#3. Money Market Funds 

The stock market is where investors buy and sell stocks. Investors may also invest in the money market, which is also known as the capital market or cash market. The government manages it in collaboration with banks, financial institutions, and other businesses by issuing money market instruments such as bonds, T-bills, dated securities, and certificates of deposit. Basically what happens is that the fund manager invests your money and pays you dividends on a regular basis. Choosing a short-term plan (no longer than 13 months) will significantly reduce the risk of investing in such funds.

#4. Hybrid Investment Funds

Hybrid funds (Balanced Funds), as the name implies, are an optimal combination of bonds and stocks, bridging the difference between equity and debt funds. The ratio may be either fixed or variable. In a nutshell, it combines the best features of two mutual funds by allocating 60% of assets to stocks and 40% to bonds, or vice versa. Hybrid funds are appropriate for investors who want to take more risks in exchange for the gain of “debt plus returns” rather than stick to lower but more consistent income schemes. 

Types of Mutual Funds on the basis of Structure

Like I mentioned earlier, different characteristics have been used to categorize the different types of mutual funds. The structural classification – open-ended funds, closed-ended funds, and interval funds – is very large. The main distinction is the ability to buy and sell individual mutual fund units.  But hey, in this category we have a little less than 4 types of mutual funds

#1. Open-Ended Funds (OEFs)

There are no restrictions on open-ended funds, such as a time limit or the number of units that can be traded. These funds allow investors to exchange funds whenever they want and exit when they need to at the current NAV (Net Asset Value). This is the only explanation why the unit capital fluctuates as new entrants and exits occur. If an open-ended fund does not want to accept new investors, it will decide to avoid doing so.

#2. Closed-Ended Funds (CEFs)

The unit capital to invest in closed-ended funds is pre-determined. That is, the fund company is not allowed to sell more than the agreed-upon number of units. Some funds have a New Fund Offer (NFO) duration, during which you must purchase units by a certain date. NFOs have a pre-determined maturity period, and fund managers may choose any fund size. As a result, SEBI has mandated that investors have the choice of repurchasing the funds or listing them on stock exchanges to exit the schemes.

#3. Interval Investment Funds

Interval funds have both open-ended and closed-ended characteristics. These funds are only available for purchase or redemption at fixed intervals (determined by the fund house) and are otherwise locked. In addition, for at least two years, no transactions will be allowed. These funds are best for investors who want to put aside a large sum of money for a short-term financial target, such as a vacation in 3-12 months.

Types of Mutual Funds on Investment goals basis

This category covers every type of mutual fund whose major aim is to try to fit into any investment goal out there. This time we have more than 4 of them, there are actually 8 types of mutual funds under this category.

#1. Growth Mutual Funds

Growth funds typically invest a significant portion of their assets in stocks and growth industries. This makes them ideal for investors (mostly Millennials) with extra cash to invest in riskier (but potentially higher-returning) plans. Or rather individuals who are enthusiastic about the scheme.

#2. Income Mutual Funds

Income funds are a form of debt mutual fund that invests in a variety of assets such as bonds, certificates of deposit, and shares. They have traditionally given investors higher returns than deposits, thanks to experienced fund managers who hold the portfolio in sync with rate fluctuations without jeopardizing the portfolio’s creditworthiness. They’re perfect for risk-averse investors with a time horizon of two or three years.

#3. Liquid Investment Funds

Liquid funds, including income funds, are debt funds because they invest in debt securities and money market funds with a term of up to 91 days. The maximum amount that can be invested is approximately $14,000. However, the way liquid funds measure their Net Asset Value is a distinguishing attribute that sets them apart from other debt funds. The NAV of liquid funds is measured for 365 days (including Sundays), while the NAV of other funds is calculated for only business days.

#4. Tax-Saving Funds

Over time, ELSS, or Equity Linked Savings Schemes, have risen in popularity among all types of investors. They not only allow you to maximize your wealth while saving money on taxes, but they also have the shortest lock-in duration of only three years. They are known to produce non-taxed returns in the range of 14-16 percent by investing primarily in equity (and related products). These funds are ideally fit for salary-earning investors looking to invest on the long term.

#5. Aggressive Growth Funds 

The Aggressive Growth Fund, which is somewhat riskier when it comes to investing. However, it is intended to make large monetary returns. Despite being vulnerable to market volatility, one may choose a fund based on its beta (a measurement of the fund’s movement in relation to the market). For instance, if the market has a beta of 1, an aggressive growth fund would have a beta of 1.10 or higher.

#6. Capital Protection Funds 

If the goal is to protect your money, Capital Protection Funds will help you achieve that goal. And you can achieve this while earning lower returns (12 percent at best). A part of the money is put into bonds or CDs, while the remainder is put into equities by the fund manager. Though the risk of losing money is low, it is recommended that you remain invested for at least three years (closed-ended) to protect your money. The returns are taxable.

#7. Fixed Maturity Funds

Many investors prefer to invest at the end of the fiscal year. The idea is to take advantage of triple indexation and lower their tax burden. Fixed Maturity Plans (FMP) – which invest in bonds, shares, money market, and other assets – is a great option if you’re concerned about debt market trends and risks. FMP also operates on a set maturity period, which can vary from one month to five years, as a closed-ended plan (like FDs). The fund manager makes sure that the money is invested for the same amount of time in order to earn accrued interest as the FMP matures.

#8. Pension Funds 

Most contingencies (such as a medical emergency or a child’s wedding) may be covered by putting a portion of your income into a pension fund for a long period of time to protect your and your family’s financial future after retirement from regular jobs. Savings (no matter how large) do not last forever, so relying solely on them to get you through your golden years is not a good idea. EPF is one example, but there are numerous lucrative schemes provided by banks, insurance companies, and other financial institutions.

Types of Mutual Funds on the basis of Risk

 The risk-conscious investors will definitely love this category. It covers the different types of mutual funds you should know on the basis of risk, 4 of them actually.

#1. Very Low-Risk Fund

Liquid funds and ultra-short-term funds (one month to one year) are known for their low risk. In other words,  their returns are often low as well (6 percent at best). Investors choose this to achieve their short-term financial goals while still keeping their capital secure.

#2. Low-Risk Funds

Investors are hesitant to invest in riskier funds in the event of Dollar depreciation or an unexpected national crisis. In such situations, fund managers consider investing in a liquid, ultra-short-term, or arbitrage fund, or a mixture of these funds. Returns may range from 6 to 8%, but investors have the option to move as valuations become more stable though.

#3. Medium-risk Funds

Since the fund manager invests a portion in debt and the remainder in equity securities, the risk factor is moderate. The NAV is not particularly volatile, and average returns of 9-12 percent are possible.

#4. High-Risk Investments

High-risk mutual funds require aggressive fund management and are suitable for investors who have no risk aversion. It also works for investors who are looking for large returns in the form of interest and dividends. Since performance evaluations are vulnerable to market fluctuations, you must conduct them on a regular basis. You should expect a 15% return on your investment. However, most high-risk funds offer returns of up to 20%.

Specialized Types of Mutual Funds

 As the name suggests, this category is a compilation of special types of mutual funds. Doesn’t necessarily fit into the categories above, but they serve certain special purposes we are about to look at shortly.

#1. Sector Investment Funds

Theme-based mutual funds invest exclusively in a single industry market. Since these funds only invest in a few stocks in particular markets, the risk factor is higher. However, it’s a good idea for investors to keep an eye on the various sector-related developments. Sector funds are also very profitable. Some industries, such as banking, IT, and pharmaceuticals, have experienced rapid and steady growth in recent years and are expected to continue to do so in the future.

#2. Index Funds 

Index funds are suitable for passive investors because they participate in an index. It is not run by a fund manager. Basically, an index fund determines stocks and their corresponding market index ratios, then invests in those stocks in a similar proportion. Even if they are unable to outperform the market, they play it safe by imitating the index’s results.

#3.Funds of Funds

A diversified mutual fund investment portfolio provides a slew of advantages, and ‘Funds of Funds,’ also known as multi-manager mutual funds, are designed to take advantage of this by investing in a variety of fund categories. In short, buying one fund that invests in a variety of funds rather than many funds achieves diversification while also lowering costs.

#4. Emerging Markets Funds

Investing in emerging markets is considered a high-risk gamble with a history of negative returns. India, for example, is a competitive and emerging market where domestic stock market investors can earn high returns. They, like all markets, are subject to market fluctuations. In the long run, developing economies are projected to account for the vast majority of global growth in the coming decades.

#5. Foreign/International Funds

International mutual funds, which are common among investors looking to diversify their portfolios outside the US, can provide good returns even when the U.S stock markets are performing well. A hybrid approach (say, 60% domestic equities and 40% overseas funds) or a feeder approach (getting local funds to invest in international stocks), or a theme-based allocation can all be used by an investor. 

#6. Global Funds

Besides the same lexical context, global funds and international funds are not the same things. While a global fund primarily invests in global markets, it can also invest in your home country. The International Funds are solely focused on international markets. Global funds, with their diverse and universal approach, can be very volatile due to differing strategies, as well as market and currency fluctuations. However, they do act as a hedge against inflation, and long-term returns have traditionally been good.

#7. Real Estate Fund

Despite the global real estate boom, many investors are still reluctant to invest in such projects because of the numerous risks in play. The investor would be an indirect participant in a real estate fund since their money will be invested in existing real estate companies/trusts rather than ventures. However, when it comes to buying a home, a long-term investment eliminates uncertainties and legal hassles while still providing some liquidity.

#8. Commodity-focused Stock funds

These funds are suitable for investors who have a high-risk tolerance and want to diversify their holdings. Commodity-focused equity funds allow you to try your hands on a variety of different trades. Returns, on the other hand, are not always predictable and are dependent on the stock company’s or the commodity’s results. In most countries, gold is the only asset that mutual funds can invest indirectly. The remainder buys commodity businesses’ fund units or shares.

#9. Market Neutral Funds 

Market-neutral funds are ideal for investors who want to shield themselves from unfavorable market trends while still earning a decent return (like a hedge fund). These funds offer high returns due to their greater risk-adaptability, allowing even small investors to outperform the market without exceeding their portfolio limits.

#10. Leveraged/inverse funds

An inverse index fund’s returns move in the opposite direction of the benchmark index, while a standard index fund’s returns move in the same direction as the benchmark index. It’s simply selling the shares when the stock price falls, then repurchasing them at a lower price (to hold until the price goes up again).

#11. Asset Allocation Funds 

This fund is extremely versatile, combining debt, equity, and even gold in an optimal ratio. Asset allocation funds may control the equity-debt distribution based on a pre-determined formula or the fund manager’s inferences based on current market trends. It’s similar to hybrid funds, but it necessitates a high level of experience from the fund manager in terms of bond and stock selection and allocation.

#12. Gift Funds

Yes, you can give your loved ones a mutual fund or a SIP to help them protect their financial future.

#13. Exchange-traded Funds (ETFs)

It is a form of index fund that can be bought and sold on exchanges. Exchange-traded Funds have opened up a whole new world of investment opportunities for investors, allowing them to gain wide exposure to financial markets around the world as well as specialized sectors. An ETF is a form of mutual fund that can be exchanged in real-time at a price that fluctuates throughout the day.

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