Types of mutual funds and why to invest in them
Because of the versatility in catering to the demands of different people, the mutual fund becomes the best tool for investment. Some people want higher returns & some search for regular returns, some are risk-averse, there is a mutual fund for every one of them. The previous idea of pooling funds together and earning a profit on that basis has become obsolete.
Below diagram shows the types of mutual fund:
B) Mutual fund based on the asset class:
- Equity funds: Equity is the main target of such mutual fund also called as stock funds. This fund invests right away in shares of listed companies and the returns are on the basis of performances of such companies. Compared to other mutual funds, the equity fund offers significant returns, even though the higher risk is its shadow.
- Debt fund: These funds invest strongly in safe and fixed income securities like government bonds, quality securities, treasury bills, etc. The main goal of these funds is being small but regular return as well as the safety of the principal amount. This fund is mainly for those with low-risk appetite and a need for regular returns.
- Money market funds: These funds invest in money market instruments like the certificate of deposits, T-bills, commercial papers, etc. issued by banks, government or corporates in a very short period of time.
B) Mutual fund based on the entrance.
- Open-ended funds: These are funds without any limitation to entry or exit, therefore an investor can buy or sell any number of units of a mutual fund based on the ongoing NAV (net asset value). An open-ended scheme is advantageous for investors who invest at regular intervals.
- Close-ended funds: In contrast to an open-ended scheme, in this fund, the unit capital to be invested is fixed (face value) and there is a pre-determined restriction for sale of units. New fund offer (NFO) is a part of close-ended fund where at a given deadline investor has to invest.
- Interval funds: Similar to hybrid fund, interval fund has the characteristics of both close as well as open-ended schemes. This fund gives the option to investors to purchase or sale of units at a pre-determined interval.