Types of Mutual Funds in India 2021 - A beginner's guide

Types of Mutual Funds in India 2021 - A beginner's guide

If you are looking for different methods that you can follow to make investments in 2021 in India, investing in mutual funds can be one of the best options for you in the current scenario. If you are a first-time investor, understanding the process of investing in mutual funds can come across as tricky and challenging at times. However, with proper research and understanding, you will make the right decision for your future investments.

As one of the primary steps, understanding the different types of mutual funds available in our country is extremely important, especially if you are a first-time investor.

Here is all you need to know about the various types of mutual funds available in India to make investments easily.

Types of Mutual Funds Schemes

Understanding the different types of mutual funds in India is the first and foremost step for you if you look forward to investing in mutual funds shortly.

Here are the major types of mutual funds that are available in India: 

1. Based on Asset Class

There are three types of mutual funds categorised as such when it comes to the asset class. These are as follows - 

• Equity funds: These majorly focus on investing in stocks. Equity funds primarily go by the name of stock funds as well. They mainly focus on investing the money that they gather from various investors into stocks in different companies.
• Money market funds: Investors tend to trade stocks in the stock market. Similarly, they also invest their money in the money market, known as the cash market through money market funds.
• Debt funds: Among the different types of mutual fund schemes in India, debt funds help investors invest in bonds, treasury bills, and other fixed-income securities.

2. Based on Structure

Several classifications can be drawn while analysing mutual funds based on structure. Here are the different types of mutual funds based on structure:

• Open-ended funds: These kinds of funds do not have a particular barrier or constraint regarding the number of units that are up for being traded. Investors can trade as many units as they want as per their convenience when they decide to invest in open-ended funds. These funds allow the investors to trade units at their convenience, and they can exit as per the net asset value (NAV) rates.
• Close-ended funds: These are the exact opposite of how open-ended funds work in the market. There is a pre-defined investment period mentioned before the scheme starts. The number of units an investor can trade is usually predetermined when investors decide to park their money in closed-ended funds. As per the New Fund Offer (NFO), investors can only invest during the initial launch period. Mini closed-ended funds allow the investors to directly sell their units to mutual funds through Net Asset Value (NAV) prices.
• Interval funds: These funds usually have characteristics of both close-ended and open-ended funds regarding the flexibility of investments. These funds allow the investors to invest during a specific interval and are closed for the rest. When investors decide to invest in internal funds, they cannot make any transactions after two years.

3. Investment Goals

The types of mutual funds that come under funds based on investment goals are as follows:

• Growth funds: These generally aim to allow the investors to have a considerable portion in the growth sectors and shares. Millennials are primarily investors with a surplus of idle money that they tend to distribute in comparatively riskier plans and are mostly positive about the scheme.
• On the other hand, income funds belong to the group of debt mutual funds that focus on distributing the money in a set of securities and bonds. Mostly fund managers who are skilled enough to have a portfolio and are less likely to compromise on their portfolios' worthiness are the investors.
• Liquid funds: Similar to the income funds, liquid funds also belong to the group of debt fund category that focuses on investing in securities, bonds, and treasury bills. The net asset value is generally calculated for 365 days when it comes to liquid funds.
• Tax saving funds: These have evolved over the past years and have come among the top categories of mutual fund schemes. Investors benefit from investing in equity-linked saving schemes while they also refrain from paying taxes. The fact that the lock-in period comes only for three years makes it even more beneficial for the investors in the long run.
• Capital protection funds: These are also important for analysing different types of mutual fund schemes in India. These funds generally focus on protecting the principal as well as earning comparatively smaller returns. The return rate tends to remain around 10% to 12%.

4. Based on Risk

Several categories come under mutual funds that are based on risk factors. The level of the risk factor involved with mutual funds makes them unique in the market.

• Low-risk funds: These are mutual funds that have a very low risk associated with them. Generally, liquid funds that offer ultra short-term investments are known to be low-risk funds. Their return rates also tend to be low, which ranges from 4% to 6%. Investors generally invest in these funds when they have short-term financial goals to fulfil.
• Medium risk funds: These funds generally offer a return rate that remains around 9% to 12% and is some of the most convenient funds for investors for different types of mutual funds in India. Medium risk funds are the leading funds that investors are more likely to invest in, considering the risk rate is not high, and the return rate is not very low either.
• High-risk funds: They, on the other hand, tend to generate a return rate that remains around 15% to 20%. Risk-averse investors tend to invest in these high-risk funds. Generally, highly financial stable investors invest in these funds.

5. Specialised Mutual Funds

Various kinds of mutual funds that come under the specialised category are mentioned below.

• Sector funds: These funds tend to invest entirely in only one specific sector. These are theme-based mutual funds. The focus is on investing in only a particular sector with only a few stocks. The risk factor, therefore, generally remains on the higher side. When investors decide to invest in these funds, they keep track of various sector-related trends and the past experiences of the mutual fund that they invest in. Sector funds are some of the best funds for returns among the different types of mutual funds available currently in India.
• Index funds: These funds are best suited for passive investors who tend to put their money in an index. An index fund generally identifies stocks and the functional ratio in the market index and then puts the money in similar stocks for maximum profit. Even when they fail to overdo the market, they generally profit by copying the market trends.
• International and foreign funds: These types focus on giving good returns to the investors when the Indian stock market performs well. An investor can also decide to follow a hybrid approach when it comes to investing in foreign funds.
• Emerging market funds: Investing in these funds can be risky at times. They do not guarantee a high return rate at the beginning. Investors who have a longer perspective in their minds tend to invest in them.
• Diversified funds: These funds can offer reasonable return rates and benefits to investors. These funds are also known as multi-manager investment funds that allow the investors to put their money in diverse fund categories, thus diversifying the risk.

How to Invest in Mutual Funds

The most crucial factor that you should know about mutual fund investments is — the process of investing. Several ways can be followed when you decide to invest in mutual funds in India. 

To start with, look at the different types of mutual funds available in India and their rates of return. Compare the return rates of your shortlisted funds to choose the best options as per your future investment goals.

You can invest in mutual funds by either following the offline or the online method. You need to visit the official website of the fund house that you are willing to invest in. You will be asked to fill out a form with all the necessary details, including your name, mobile number, email address, bank details, identity proof, and other details.

If you do not have a complete KYC registration, you will be prompted to complete it online before starting investing. Also, submit your Aadhaar card and PAN card details to move forward.

After the verification of all these details, you can quickly start investing in your preferred mutual funds. However, before you start, make sure you thoroughly go through the investment objectives, risk-tolerant rates of the fund you are investing in, their past performance, receipt years, and other financial details.

FAQs

✅ Is it safe to invest in mutual funds in India?

Ans: If you decide to invest in mutual funds in India, it is advisable to invest in instalments instead of making lumpsum investments in any mutual fund in the country. That way, it remains risk-free and secure throughout the procedure.

✅ Is a net banking account mandatory if I decide to invest in mutual funds?

Ans: Yes. Having an activated internet banking account is mandatory for anyone who decides to invest in Mutual Funds in India.

✅ What are some of the most popular mutual funds to invest in safely?

Ans: Some of the major schemes you can invest in are Axis Bluechip Fund, Miraw Asset Large Cap Fund, DSP Midcap Fund, SBI Small Cap Fund, Kotak Standard Multicap Fund, etc.

✅ Is a higher NAV better than a lower MAV?

Ans: A higher NAV gives you more units. And a higher NAV gives you a lesser number of units.