February 24, 2024

Understanding Which Mutual Fund Type is the Most Suitable for You?

3 min read
Mutual Fund

A mutual fund is a form of financial vehicle that pools the funds of numerous investors into a single investment product. The fund then concentrates on using those assets to invest in a group of assets to meet the fund’s investment objectives. Mutual funds come in a variety of shapes and sizes. This large variety of accessible items may appear intimidating to some investors. Let’s understand the best types of mutual funds you must invest in.

Based on the Mutual Fund Structure

A mutual fund scheme can be characterised as open-ended, close-ended, or interval, depending on its maturity time. Let us clarify:

Open-Ended Mutual Funds

You can invest and redeem your money in open-ended mutual fund schemes whenever you wish. There is no maturity period or time limit for investing in the plan. As a result, open-ended mutual funds are liquid. The majority of mutual fund plans are open-ended. However, exceptions to lock-in include ELSS schemes and, in some cases, solution-oriented systems. While redemption is not permitted, solution-oriented funds may have up to 5 years of lock-in periods.

Close-Ended Mutual Funds

Closed-ended mutual fund schemes have a predetermined investment and maturity duration that is accessible upon the introduction of their New Fund Offer (NFO). Investments may only be made during this time, and redemptions have a set maturity date. Following the NFO, several closed-ended plans are listed on stock exchanges, allowing investors to trade them.

Periodic repurchasing is also possible, in which investors can sell units back to the mutual fund company. SEBI requires mutual fund companies to provide investors with an exit strategy through stock exchange sales or selling back to the business.

Interval Mutual Funds

Interval mutual funds, as the name implies, allow you to invest or redeem at regular intervals. These are essentially closed-ended funds with some windows for entering and exiting the fund.

Based on Investment Goals

The following are the many types of mutual funds depending on investing objectives:

Growth Funds

Growth funds often invest significant assets in stocks and growth sectors, making them ideal for investors (mainly Millennials) with excess cash to invest in riskier plans (but with potentially substantial returns) or who are enthusiastic about the scheme.

Income Funds

The income funds are a type of debt mutual funds that invests in a variety of assets such as bonds, certificates of deposit, and securities. These funds have historically earned investors higher returns than deposits because they are managed by professional fund managers who maintain the portfolio in sync with rate swings without jeopardising the portfolio’s creditworthiness. They are best suited for risk-averse investors with a 2-3-year time horizon.

Liquid Funds

Liquid funds, like income funds, are debt funds since they invest in debt instruments and money market funds with maturities of up to 91 days. The highest amount that may be invested is Rs 10 lakh. The method by which the Net Asset Value is computed distinguishes liquid funds from other debt funds. The NAV of liquid funds is calculated for 365 days (including Sundays), whereas the NAV of others is calculated for just business days.

Based on Portfolio Management

Mutual funds are classified according to how the portfolio is handled. Mutual fund schemes are classified into two types: active and passive.

Active Mutual Funds

Actively managed mutual funds are ones in which the fund manager constantly searches for methods to improve returns. When he finds an opportunity, the fund manager sells and buys stocks.

Passive Mutual Funds

The term “passively managed funds” refers to funds like exchange traded fund in which the fund manager does not actively manage the portfolio. The portfolio mirrors a certain index, meaning the money is distributed precisely as it is in the underlying index. Any changes to the portfolio are made only if the index composition changes.

Conclusion

Instead of pursuing an illusion of the finest mutual fund, the ideal investing strategy is to choose the proper fund for your financial needs. And, if we base our study on the above-mentioned fact, selecting the appropriate fund is not difficult.

Now that you know everything about this powerful investment instrument, download any online banking or fintech application to begin investing in mutual funds based on your financial goals.

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