Mutual Fund | What is Mutual Fund? Definition, Meaning and Types of Mutual Funds - financebrother


Mutual Funds

Mutual funds are the pooling of funds from many investors who have a common investment objective and invest that fund in the securities market. The money of mutual fund investors is managed by professional fund managers. The term mutual is widely used in the United States, India and Canada, while the Société d’investissement à Capital Variable, or SICAV, is an open-ended publicly traded investment fund in Europe and an open-ended investment organization in the United Kingdom.


Types of mutual funds based on structure:-

Open-Ended Funds
Open-ended schemes of mutual funds provide flexibility for the investors to invest and withdraw their funds as per their convenience and when they want to do so. The units of these funds are open to purchase or redemption at any point of time based on the prevailing NAV. They are actively managed funds, hence charge more fees than passively managed funds. They are not bound to investors for any specific maturity, hence they are the ideal investments for those investors who want to make investments along with liquidity.

Closed-Ended Funds
Close-ended schemes of mutual funds allow the investors to purchase the units of the funds only at the time of the initial fund offers (IFO’s). Units of these types of funds can only be redeemed at a specific maturity date. To provide liquidity to these funds, asset management companies list their funds on the stock exchanges where the buying and selling of the units of these funds takes place between the investors at the prevailing unit price of the units, as in these schemes mutual fund issuers will not buy back their units until their maturity date.

Interval Funds
Interval Funds have the features of both open-ended funds and close-ended funds in which they offer investors to sell their units directly to the fund management company at different intervals until the maturity of the funds at the prevailing unit price on the market.

Types of Mutual Funds based on Asset Class:-

Debt Funds
These funds invest in the debt market instruments such as government bonds, company's debentures etc. and earn a fixed-return for their investors. These are considered as safe investments where risk is very low. As a result, returns generated by these funds are also less compared to other riskier funds.

Equity Funds
As the name suggests, these funds invest in equity of the companies and purchase their small part of ownership. These funds are linked to the market fluctuations of the shares of those companies, hence considered as high-risk funds, but also tend to provide high-return as well. These funds also come with specific sectorial funds like fast-moving consumer goods (FMCG’s), Metals, Non-banking financial companies (NBFC’s), etc.

Hybrid or Balanced Funds
Hybrid funds are a combination of both equity and debt funds. These funds invest in both equity and debt, but in some cases, the proportion of debt is higher than equity and vice versa to balance their risks and returns. These funds have less risk than pure equity funds as they reduce their risk by investing some of their funds in fixed return investment securities.

Money Market Funds
These funds are invests in money market instruments like Treasury Bills (T-Bills), Commercial Papers (CP’s) etc. These funds are considered as safe investment funds which generate moderate returns in a short time period. These funds are for those investors who have surplus funds for a short time span and want a moderate return on those funds. They are also considered as cash market investment funds that contain interest rate risk, credit risk and reinvestment risk.

Types of Mutual Funds based on specialties:

Index funds
Index funds invest in shares of the respective companies of that index as per the weight in the index. These funds act as the mirror of the market fluctuations and link their performance as per the market index movements. They are high riskier funds with a high potential return on investments. They are linked with indices like Dow Jones Industrial average funds, BSE Sensex funds etc.

Sector Funds
For investors, those who want to invest their money in the particular sectors like metals, Banking, Financial Services, etc., they invest their money in sector funds. The performance of these funds is totally linked with the performance of that sector. Hence, the better the sectoral performance, the higher the funds returns and vice versa.

Exchange Traded Funds (ETF’s)
The funds which are traded on the securities exchange market are ETFs. They have features of both open-ended funds and close-ended funds. They are passively managed funds and offer high liquidity to the investors along with having a low service charge and entry/exit load.

Gilt Funds
These funds are invested in government securities and bonds for a long period of time. They are considered as proper risk-free investments and the most favorable investment funds for those who don’t want to take risks in their investments.

Fund of Funds
The funds which are invest in other mutual funds and returns depend upon the performance of the targeted funds. These funds are considered as a safe investment as the investors investing in the funds actually invest in other mutual funds, hence mitigating the investment risk from any of the invested funds.

Commodity focused stock funds
Investment made by these funds in companies that are related to or working in the commodities market, like steel, mining, cement companies. These funds are linked with the performance of those commodities in the market as per the association of their production.

Real Estate Funds
These funds are invest in those companies that perform their operations in the real estate sector. They can invest their funds in property dealers, builders, and realtor companies and also invest in financial companies who provide loans to the real estate sector.

International Funds
International funds are those foreign funds that invest in the companies of different countries all over the world. The only restriction on international funds is that they won’t invest in those companies which are located in the investor’s own country.

Global Funds
Global funds are those foreign funds that invest in the companies of different countries all over the world. The only difference in these funds is, unlike international funds, they also invest in those companies which are located in the investor’s own country.

Leveraged/Inverse Funds
These are considered as negative funds as the return associated with these funds is opposite to the market movements. They generate more returns when market performance is weak and provide negative returns when the positive performance of the markets.


Types of Mutual Funds based on Investment Objective:

Growth Funds
Growth funds generally invest in the equity market with the goal of generating high capital gains. These funds are considered as more risky for investors along with having the potential to generate a high return on investments. In the long time horizon, these funds generally perform well and may provide a multi-fold return to the investors.

Liquid Funds
These funds are invest in money market instruments like Treasury Bills (T-Bills), Commercial Papers (CP’s) etc. These funds are considered as safe investment funds which generate moderate returns in a short time period. These funds are for those investors who have surplus funds for a short time span and want a moderate return on those funds along with liquidity on their funds.

Income Funds
The purpose of these funds is to provide regular income for investors, hence they invest their money primarily in fixed income securities like debentures, bonds, etc. These are safe investment funds and generate regular nominal returns for their investors.

Tax-Saving Funds/Equity Linked Saving Scheme (ELSS)
Under this scheme, investors invest to save their tax liability up to the certain limit mentioned in the Income Tax Act of that country. Investments made in these funds are applicable for deduction of tax liabilities and consider high risk funds because of long-time horizon prospects, but also offer a high return on investment depending upon funds performance.

Pension Funds
These funds generally make their investment keep in mind the long term horizon and have to provide regular returns around the time for the investor to secure their post-retirement financial needs. They invest their fund in the hybrid mode as the combination of both equity and debt, where equity has higher risk and return abilities, while debt mitigates the risk and provides a lower but steady return.

Types of Mutual Funds based on their Risk of the Investments:

High Risk Funds
Those investors who have a higher risk-taking appetite and are willing to take higher risk, invest their money in these funds as they invest in higher risk securities to generate a multi-fold return on their investment for creating wealth for their investors. These funds make investments in equities, derivatives and other riskier markets.

Medium Risk Funds
These funds are for those investors who want to take moderate risk and want to create their wealth over a long period of time. These funds invest 70%-80% in equity and the rest in the debt or fixed income securities to balance the risk associated with the funds. Investors of these funds will get high returns in the long time horizon.

Low Risk Funds
The ideal investment fund for those investors who don’t want to take risk and want a steady, low fixed return on their investments. These funds invest in fixed income securities like debentures, government bonds, commercial paper, etc. where risk is negligible. Although these funds are also not totally risk free, the interest rate risk and reinvestment risk are associated with them.


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