Investors are often looking for ways to park their investments safely and earn significant returns for over a period. Either a stable source of income or long term wealth creation or both is the primary motive behind any investment decision. In India, different investment modes are available for an investor; the most popular are mutual funds.
Mutual funds are available to investors from all walks of life and here are five common types of mutual funds that everyone should learn about.
- Tax Saving Funds
- Open-Ended Funds
- Equity Funds
- Debt Funds
- Pension Funds
In India, there are many types of mutual funds that can be classified on various grounds such as asset class, investment objective, expertise, structure, associated risk, and many other factors. But there are some forms of mutual funds that investors prefer. Here are five types of mutual funds that everyone should know.
Tax Saving Funds – The purpose of such mutual funds, as the name suggests, is to help investors save their income tax liabilities. U/S 80C of the Income Tax Act, to save tax on mutual funds, Rs 1.50 lakh rupees can be deducted from the money invested in a financial year. More popularly known as ELSS, these funds mainly invest in the equity market. As a result, a specific element of risk increases in this type of mutual fund. But on the other hand, if it is in line with the target, then you can make a better profit relative to FD or PPF.
Open-Ended Funds – Units are open for redemption and investment in this form of mutual funds for the whole year, that is, you can hold your investment as long as you want without any upper or lower limits. Depending on the prevailing NAV, membership, and redemption occur. A fund manager is usually nominated on behalf of investors to make investment decisions. Such mutual funds are ideal for investors who want to invest in the capital market risk but also want liquidity benefits.
Equity Funds – Such mutual funds are investing in equity shares of companies. There is a designated fund manager on behalf of the investors to make investment decisions. It is learning that direct investment in equity can be quite risky. But investing in equity funds is a relatively cheaper option. It gives you the benefit of regular dividends as well as wealth creation. In the worst case, when you invest directly in the equity market, your NAV may fall slightly as opposed to losing your entire investment. It is done by investing in various special funds such as insurance, oil and gas, transportation, automobiles, etc.
Debt Funds – Such mutual funds, as the name suggests, invest in debt instruments such as government bonds, fixed income securities, company debentures, etc. Debt funds are a safer investment option than equity funds, which offer fixed returns.
Pension Funds – Investors with a long-term outlook belong to these mutual funds. The sole purpose of investing in pension funds is to ensure consistent returns as soon as the investor retires. Pension fund holdings are divided between the debt market and the equity market. The equity component, while the debt element provides stable returns, offers high returns with high risk. You can receive returns in a lump sum, pension, or a combination of both.
Note: These are the five most important types of mutual funds you need to know about. You need to do an in-depth analysis and consider your risk tolerance and funding criteria before making any investment decision.