27 Dec 2023
Are you looking to invest in mutual funds but feeling overwhelmed by the array of options available? Look no further! This blog aims to simplify the world of mutual fund investments by providing you with a comprehensive guide to the types of mutual funds. Whether you're a beginner or experienced investor, find the perfect match for your investment needs.
Mutual Funds - what are they?
Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They're managed by professional fund managers, who make investment decisions on behalf of the investors. Mutual funds offer diversification, liquidity, and professional expertise, making them accessible and suitable for individuals with various investment goals and risk tolerances. Investors buy shares in the mutual fund, and the value of their holdings fluctuates with the performance of the underlying assets.
Types of Mutual Funds in India
Each type of mutual fund has its own risk-return profile, making it essential for investors to align their investment goals, risk tolerance, and time horizon with the appropriate fund type. Here are different types of mutual funds in India:
1. Mutual Funds based on Organisation Structure
Investors should consider their investment goals and liquidity needs when choosing between these mutual fund types, as each offers distinct advantages based on time horizons and accessibility preferences. Mutual funds based on Organisation Structure can be categorized into three types:
Open-Ended Schemes:
These funds do not have a fixed maturity date, allowing investors to enter and exit the fund at any time. They offer liquidity and flexibility, making them suitable for investors who prefer easy access to their investments. The fund size can fluctuate based on investor inflows and redemptions, and the Net Asset Value (NAV) is determined daily.
Closed-Ended Schemes:
Closed-ended funds have a fixed maturity period Investors can buy units of the fund only during the initial offer period. After this period, units can be traded on stock exchanges. The fund's size remains constant, and investors can exit by selling their units to other investors.
Interval Funds:
Interval funds combine features of both open and closed-ended schemes. They offer periodic intervals during which investors can buy or sell units. The intervals can be quarterly, semi-annually, or annually. The transaction period has to be for a minimum of 2 days and there should be at least a 15-day gap between two transaction periods.
2. Mutual Funds based on Management of Portfolio
Mutual funds can be categorized based on how they manage their investment portfolios, with the primary distinction being between actively managed and passively managed funds.
Actively Managed Mutual Funds:
In actively managed mutual funds, a team of professional fund managers and analysts actively selects and manages the portfolio's securities. Their goal is to outperform a specific benchmark index or achieve predefined investment objectives. To do this, they engage in in-depth research, analyze market trends, and make decisions to buy or sell securities based on their assessment of market conditions and individual asset performance. Active fund management entails a dynamic approach where the fund manager actively selects investments they believe will provide the best possible returns. While this approach offers the potential for alpha, which is the excess return above the benchmark index, it typically comes with higher management fees due to the costs associated with professional management and research.
Passively Managed Mutual Funds (Index Funds):
On the other hand, passively managed mutual funds, often referred to as index funds, Exchange Traded Funds (ETF’s) follow a more passive approach. These funds aim to replicate the performance of a specific benchmark index, such as the S&P 500 or Nifty 50. They achieve this by holding a portfolio of securities that mimics the composition and weightings of the benchmark index. Since index funds/ETFs seek to match the index's performance rather than beat it, they require minimal trading activity and portfolio turnover. Consequently, they tend to have lower expense ratios compared to actively managed funds. While index funds/ETF’s closely track the benchmark index, there may be a slight variance known as tracking error.
3. Mutual Funds based on Investment Objective
Mutual funds are categorized based on their investment objectives, and the three primary objectives are growth, income, and liquidity.
Growth-Oriented Mutual Funds:
Growth-oriented mutual funds aim to provide investors with capital appreciation over the long term. These funds primarily invest in assets like stocks or equities, which have the potential for significant price appreciation over time. Investors seeking to build wealth and achieve higher returns often opt for growth-oriented funds. These funds are well-suited for individuals with longer investment horizons and a higher risk tolerance.
Tax Saving Funds:
They are also known as Equity-Linked Savings Schemes (ELSS), are mutual funds designed to offer investors the dual benefit of potential capital appreciation and tax savings under Section 80C of the Income Tax Act in India. These funds primarily invest in equities, providing the opportunity for higher returns ELSS funds have a lock-in period of three years, the shortest among tax-saving options, making them a popular choice for individuals looking to reduce their tax liability while aiming for long-term wealth creation through equity investments.
Income-Oriented Mutual Funds:
Income-oriented mutual funds, also known as fixed-income or bond funds, prioritize providing regular income to investors. They achieve this by investing in interest-bearing securities such as government bonds, corporate bonds, or other fixed-income instruments. Investors looking for a stable source of income, such as retirees or those with short- to medium-term financial goals, often choose income-oriented funds. These funds typically offer lower risk and lower potential for capital appreciation compared to growth-oriented funds.
Liquidity Mutual Funds :
Liquidity mutual funds are designed for investors who require easy access to their funds without significant penalties. They typically invest in highly liquid assets like money market instruments or short-term bonds. These funds are ideal for individuals with short-term financial goals or those who want to maintain a liquid portion of their portfolio for emergencies or opportunistic investments. While liquidity-oriented funds offer safety and quick access to funds, they may provide lower returns compared to growth or income-oriented funds.
4. Mutual Funds based on Underlying Portfolio
Mutual funds can be categorized based on their underlying portfolio composition, and these categories help investors choose funds that align with their investment preferences and risk tolerance. Here are some common categories based on the underlying portfolio:
Equity Funds:
These mutual funds primarily invest in stocks or equities. They offer the potential for high returns over the long term but come with higher risk due to stock market volatility. Equity funds are categorized further based on market capitalization, such as large-cap, mid-cap, and small-cap funds.
Debt Funds:
Debt funds invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments. They provide regular income through interest and are generally considered lower-risk investments compared to equities.
Hybrid funds:
They are also known as balanced funds, are a category of mutual funds that combine investments in both equities and fixed-income securities. These funds aim to offer a balanced portfolio by diversifying across asset classes, providing investors with the potential for capital appreciation along with regular income. The allocation between equities and debt instruments can vary based on the specific type of hybrid fund.
Money Market Funds:
Money Market Funds invest in short-term, highly liquid instruments like Treasury bills and commercial paper. Money market funds aim to provide capital preservation and stability, making them suitable for short-term investments.
Multi-Asset Funds:
They are a versatile investment option that provide diversification by allocating investments across multiple asset classes, including equities, fixed income, and alternative investments like real estate or commodities. These funds offer a balanced approach to managing risk and returns, making them suitable for investors seeking a single investment vehicle that provides exposure to a variety of asset classes.
Other category of schemes:
They are a category of mutual funds tailored to address specific long-term financial goals. These funds have predefined investment horizons aligning with investors' objectives.
Retirement Funds:
These aim to build a corpus for retirement planning. They offer a long-term investment horizon, adjusting asset allocation over time, starting with higher equity exposure and transitioning to debt for reduced risk as retirement nears.
Children's Funds:
Designed for future financial needs like education or marriage expenses for children. Children's funds feature a long-term horizon and a balanced mix of equity and debt instruments. They may offer flexibility for partial withdrawals when required, depending on the fund.
Arbitrage Funds:
Arbitrage funds aim to capitalize on price differences between the cash and futures markets. They invest in a combination of equity and equity-related instruments and use arbitrage opportunities to generate returns. These funds are considered relatively low risk and are often used for short-term investments and tax efficiency.
Fund of Funds (FoFs):
Fund of Funds is a mutual fund scheme that primarily invests in other mutual funds rather than individual securities. FoFs offer diversification across various asset classes, making them suitable for investors seeking a hassle-free way to create a diversified portfolio without the need for extensive research and selection of individual funds.
Conclusion
Well, selecting the mutual fund investment involves understanding the various types of mutual funds available and aligning them with your financial goals, risk tolerance, and investment horizon. Whether you seek the potential for capital appreciation, regular income, or tax-saving benefits, there's a mutual fund category to suit your needs.
Equity funds offer growth potential, debt funds provide regular income, and hybrid funds aims to strike a balance. Solution-oriented schemes like Retirement Funds and Children's Funds address long-term objectives. By diversifying your portfolio across these fund categories, you can build a well-rounded investment strategy tailored to your unique financial aspirations and circumstances. Remember, informed decisions pave the way for successful investments.
Hope, now you have the knowledge and confidence to choose the mutual fund type to kick-start or enhance your investment journey.
Disclaimer:
The document is not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited, and accordingly, persons who come into possession of this document are required to inform themselves about and observe any such restrictions.
The document includes statements/opinions which contain words or phrases such as "will", "believe", "expect", and similar expressions or variations of such expressions that are forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements due to risks or uncertainties associated with the statements mentioned with respect to but not limited to exposure to market risks, general and exposure to market risks,
general economic and political conditions in India and other countries globally, which may have an impact on services and/or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.
Past performance may or may not be sustained in future. For a detailed portfolio and related disclosures for the schemes, please refer to our website https://www.kotakmf.com/Information/forms-and-downloads. The portfolio and its composition are subject to change, and the same position may or may not be sustained in future. The fund manager may make the changes as per different market conditions and in the best interest of the investors.
Investors may consult their financial advisors and /or tax advisors before making any investment decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY