Mutual funds are largely considered to be a safe, secure, and reliable investment vehicle. This is primarily because they provide the benefits of professional management coupled with portfolio diversification which can collectively help enhance potential rewards while lowering the risk profile.
However, as an investor, you must be extremely cautious about the specific type of mutual fund that you are investing in. Not only should it suit your financial objectives, but it should also be able to match your risk appetite while fitting into your expected tenure.
Here is a list of the different types of mutual funds which you can include in your strategy depending on what kind of an investor you are.
Funds Based on Investment Objective
If you are the type of investor who purchases securities on the basis of their final financial objective, you might consider the following funds:
- Growth Funds- The primary objective of this fund is capital appreciation. Therefore, the money tends to be invested in equity stocks. Although these funds provide good returns, they are also highly risky.
- Income Funds– The goal of such funds is to provide a regular income to the investors. Thereby, they are basically invested in instruments like bonds and debentures which can provide a fixed income.
- Liquid Funds– The fundamental aim of these funds is to earn moderate but immediate returns by investing in short-term instruments like Treasury bills and commercial papers.
- Tax-Saving Funds– If you are the type of investor who is looking for a way to save income tax, tax-saving funds like ELSS can prove to be your best bet. Investments made in them are deductible under the Income Tax Act.
- Capital Protection Funds- As the name itself suggests, the function of these funds is to protect the principal amount. In order to do this, they are invested in both, equity markets and fixed income instruments.
- Fixed Maturity Funds- These funds are meant to bring about a sense of financial discipline in investors as the money invested in them cannot be accessed before a certain maturity date.
- Pension Funds– Essentially, the goal of these funds is to build up a corpus by the time an investor retires. Their portfolio consists of both, equity and debt instruments so that risk can be balanced and returns can be assured.
Funds Based on Tenure
Depending on the amount of time that one wants to stay invested, mutual funds can be divided into:
- Short-Term Funds– As an investor, if your desired tenure ranges from a month to a year, ultra-short-term debt funds and liquid funds can be a good option to invest in. The returns they offer are slightly higher than the conventional savings account and fixed deposits. However, the risks associated with short-term funds are extremely high.
- Long-Term Funds– If you are the type of investor who wants to deal with the stock market for a term ranging from 1- 30 years, large cap equity funds, diversified funds, and hybrid funds might be the best alternative for you. A long-drawn investment would reduce your tax obligations and the returns earned would be gradual but steady.
Funds Based on Risk Appetite
Investors can also be classified on the basis of their risk appetite. While some investors chase high-risk and high-return funds, many others prefer the low-risk, moderate returns option. The mutual funds which might be employed for this purpose are:
- Aggressive Funds– These funds are meant for those investors who are willing to take high risks in order to build a greater amount of wealth. Thus, the investments which can best suit them would be in funds like inverse mutual funds.
- Moderate Funds- Moderate funds are usually acquired by investors who have a medium risk profile. The returns yielded too fall in the moderate category. These funds can be used for specific purposes like funding your child’s education or taking a vacation.
- Conservative Funds– Investors who purchase conservative funds do not have a high-risk appetite. They prefer investing in conservative funds like debt funds and government securities which have a long-term tenure but deliver low returns.
Funds Based on Asset Class
Some investors with knowledge and expertise of the stock market choose to make investments based on the asset class and structural composition of the mutual funds. For them, mutual funds can generally be of the following types:
- Equity Funds– Equity funds are largely invested in the stocks and shares of listed companies.
- Debt Funds– Debt funds are primarily composed of government bonds, debentures, and fixed assets.
- Money Market Funds- These funds are invested in short-term liquid instruments like treasury bills.
- Hybrid Funds– Hybrid funds consist of asset classes which include a healthy mix of both, equity and debt markets.
The Road Ahead
For investors, selecting a type of mutual fund which meets their specific needs and requirements is indeed a challenging task. This is where online platforms like Oro Wealth can provide assistance. Not only do they help you compare various kinds of mutual funds, but with their time-tested strategies, they also suggest which funds would suit your age, gender, risk profile and investment objective. You can click here to know more about these different types of mutual funds on the Oro Wealth platform.
As market fluctuations become far too frequent and financial transactions turn increasingly complex, finding a mutual fund which is both, effective and trustworthy would require a certain amount of diligence. This is why, irrespective of your fund or investor type, it is vital to take all monetary decisions with prudence and extreme caution.