Hi, Welcome In this article, we will take a look at some of the common types of mutual funds. This is an extension of an already-written article about the Complete Mutual Fund Guide. Please kindly read that before to understand more about mutual funds.
What are the different types of mutual funds?
There can be many different types of mutual funds based on different investment objectives. They can vary depending on where they invest, what they invest for, how they are managed, and so on. There is really no limit, but here are some major ones which you will hear often.
Equity Fund
These funds invest in a pool of public company stocks listed on exchanges. They are high-risk high rewards. If companies in the mutual funds did well, the stock prices rise and hence its NAV, if it loses or goes bankrupt, you lose money. Since these are businesses you are investing in, you should give them time to grow > 3-5 years. Just like a shop doesn’t always give returns in a single month or year, it is the same principle with equity mutual funds. Several Funds belong to the equity type.
- Large Cap or Bluechip – Invest in very large companies with high reputations. Since they are massive in size they are comparatively safer also. These companies are generally market leaders and less volatile.
- Mid Cap – Invest in medium-sized companies. These companies are less volatile than small-cap but have higher volatility than Large cap. These have the potential to become the next blue chip stock.
- Small Cap – Invest in small companies. these are risky but have great growth potential. Also, these are highly volatile and hence highly risky. You may see > 60-70% crash during a down market. They grow very fast too.
- Multi Cap – Invest in all types of companies large, medium, and small based on a pre-defined fixed ratios range.
- Flexi Cap – Same as multi-cap with no restriction on any ratio.
- Sectoral/Theme – Invest in a particular sector like technology, healthcare, banking, etc, or any theme like electric vehicle theme which may consist of stock like auto, battery, power companies, etc combined.
- Value – These funds look for stocks that are currently trading at discount due to some reason but have long-term potential, based on Warren Buffet’s principles.
- Contra – These funds invest against the existing market trends and purchase stocks that are not performing well currently.
Debt Fund
These funds invest in bonds, t-bills, government securities, etc. These funds are much safer compared to equity since they invest your money in secured securities but they give fewer returns also, for example, A bond is a type of security under which the issuer owes the holder a debt and is liable to pay. but that doesn’t mean it may not default. A company, state, or even country can go bankrupt but the likelihood is very rare.
- Based on underlying maturity time
- Overnight – 1 day
- Liquid Funds – <91 days
- Ultra Short Duration – < 6 months
- Short Duration – 1 to 3 years
- Medium Duration – 4 to 7 years
- Long Duration – > 7 years
- Dynamic Bond – Invest in debt and money market instruments like Government Securities, corporate bonds, etc of different durations.
- Gilt – Invest primarily in government securities which are considered safest among debt.
- Credit Risk – Invest in low-credit quality debt securities
- Floater – Invest at least 65% of their money in floating-rate bonds. Floating rates bonds are bonds whose bond yield (return percentage) can change during the holding period
- Corporate Bond – Invest 80% of the money in companies with the highest possible credit rating
Hybrid Fund
Invest in all, Stocks, Bonds, Money market, etc. They are a combination of Equity, Debt, Gold, Real Estate, and other assets. These funds provide exposure to multiple asset class and are good for both growths while protecting money.
- Dynamic asset allocation/ Balanced advantage fund – These funds frequently adjust the mix of asset classes to suit market conditions. If markets are high they may shift the allocation more towards debt instruments from equity and vice versa.
- Arbitrage – These funds get benefit from the simultaneous purchase and sale of the same asset in different markets in order to profit from price differences
- Multi-Asset allocation – These funds must have investments in at least three asset classes, equity, debt, real estate, gold, etc.
- Aggressive – Hybrid fund with more allocation to high-growth stocks.
Index Fund
An index fund is a type of passively-managed mutual fund that tracks and attempts to replicate the performance of a market index, like Sensex, S&P, Dow Jones, etc. These have the lowest expense ratio/fee because the composition is fixed and may not need an active and dedicated fund manager. They are more automatic in nature.
The good part is no active involvement of a person so no bias in selecting stocks and hence no errors. The not-so-good part is It almost never outperforms the benchmark index.
International Funds
These funds are the funds that provide exposure to other countries’ stocks and markets internationally. The underlying assets can be international stocks, ETFs, mutual funds, or a combination of all.
Fund of Funds
These funds generally invest in other funds or other indexes. It may contain multiple funds inside a single fund. This gives more diversification and exposure
Solution Oriented or Target Date Funds
These funds are created to achieve some solution or goals and invest based on that. These are self-explanatory. they can be active or passive funds. Here are some examples.
- Retirement Planning
- Marriage Fund
- Child Education etc.
These are the major types of mutual funds do let me know if you like the article and leave me a comment if you want me to include any other.
