Understanding The Various Types of Mutual Funds
Mutual funds offer an opportunity to invest across different asset classes based on your financial goals, risk profile and investment horizon. Be it a seasoned investor or a budding investor, anyone can invest in mutual funds to grow wealth. However, in order to make an informed decision, it is necessary to know the various types of mutual funds available for investing.
Broadly, mutual funds are divided into three categories i.e. equity funds, debt funds, and hybrid funds. Let’s gain a deeper understanding of each one of these.
- Equity Funds or Growth Funds:
These funds invest in stocks of companies focusing on one or multiple sectors. They aim to grow wealth for achieving long term goals like retirement planning, children’s education, and the likes. Being a high risk opportunity, these funds deliver relatively higher returns on investment. You may invest in different types of equity funds to achieve your financials goals as follows:
- Large Cap Funds generate relatively stable returns by investing in stocks of well-established companies. Small Cap Funds and Mid Cap Funds, on the other hand, are high-risk high-return funds that invest in stocks of small-sized and mid-sized companies respectively.
- Highly aggressive investors may invest in Focused Funds which maintain a portfolio of highly promising stocks to deliver outstanding returns.
- ELSS Funds enable tax-saving of up to Rs 1.5 lakh under Section 80C of the Income Tax Act along with long term wealth accumulation.
- To enjoy the benefit of a particular sector/theme, you may also invest in Sector Funds and Thematic Funds.
2. Debt Funds or Income Funds:
These funds invest in interest generating securities like treasury bills, government securities and bonds. They aim to preserve the capital and generating a regular income on investment. These funds are comparatively safer than equity funds. As compared to traditional bank FDs, debt funds are better avenues to grow wealth over medium to long term. There are different kinds of debt funds available for different financial goals as follows:
- Duration based funds beginning from Overnight Funds to Long Duration Funds invest in debt securities which mature at different dates. You may invest in them as per your investment horizon.
- Liquid Funds provides you instant access to cash during emergencies.
- Aggressive investors may allocate a part of their portfolio towards Credit Risk Funds which invest in risky corporate bonds.
- Gilt Funds invest in government securities having different maturity dates to generate optimal returns on investment.
- Dynamic Bond Funds are all-season funds to grow wealth by taking advantage of interest rate movements.
3. Hybrid Funds:
These funds invest in a combination of stocks, bonds and gold in a specific proportion. The equity component helps to enhance return on investment while the debt component provides a cushion during market swings. These funds aim to generate wealth over the medium to long term by taking moderately high risk. Hybrid funds can be of the following types:
- Conservative/Balanced/Aggressive Hybrid Funds invest in a blend of stocks and bonds to generate optimal returns.
- Multi Asset Allocation Funds invest in a portfolio which is made up of multiple asset classes like stocks, bonds and gold.
- Hybrid Funds may be suitable for retirees who want to beat inflation and earn higher returns on their retirement corpus.
- Arbitrage Funds generate gains by using the price differential of an asset (like stocks) in the cash and derivatives market.
- Equity Savings Fund invest in stocks, debt securities and utilize arbitrage opportunities to accumulate wealth.
The Final Takeaway
Investing in mutual funds is a smart way to earn a higher return on investment. However, choosing the right fund can become a task sometimes. To kick start your investment journey, you can explore the Investment Packs on Paytm Money app. These well-diversified packs are designed to suit your risk profile and may cater to your investment needs.
