There are several types of mutual funds available, each with its own set of characteristics and investment objectives. It is critical for investors to know the features of these products, before money is invested in them.
Here is a list of some common types of mutual funds:
Equity Funds
These funds invest in stocks and aim to provide capital appreciation over the long term. There are various subcategories of equity funds, including large-cap, mid-cap, and small-cap funds, sector funds, and international funds. ELSS Funds are a type of mutual fund that is eligible for TAX DEDUCTIONS under Section 80C of the Income Tax Act of 1961 in India.
Debt Funds
These funds invest in fixed-income securities such as corporate bonds, government bonds, and treasury bills. Debt funds generally have lower volatility and provide a steady stream of income in the form of interest payments.
The main investing objective of a debt fund is usually preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration.
Balanced Funds
These funds invest in a combination of stocks and bonds, with the aim of providing both capital appreciation and a steady stream of income.
Money Market Funds
These funds invest in short-term, low-risk securities such as treasury bills and commercial paper. They aim to provide a stable value and a moderate level of income.
Index Funds
These funds aim to replicate the performance of a particular market index, such as the Nifty 50 , Banknifty. They do this by investing in the same stocks as the index in the same proportions. Index funds generally have low expense ratios because they do not require active management.
The objective of a typical Index Fund states – ‘This Fund will invest in stocks comprising the
Nifty 50 and in the same proportion as in the index’.
Fund of Funds
These funds invest in other mutual funds, rather than directly in stocks or bonds. This allows the fund to diversify its holdings across a wide range of investment strategies.
Specialty Funds
These funds focus on specific sectors, such as real estate, natural resources, or healthcare. They may also have a specific investment style, such as value or growth. Specialty funds can be more volatile than other types of mutual funds because they are focused on a particular area of the market.