Different Types of Mutual Funds and Pros and Cons of Each of Them

Different Types of Mutual Funds and Pros and Cons of Each of Them

In an era where economic uncertainties are dotting the landscape, mutual funds are largely considered to bring about a semblance of stability and security. Being professionally managed and diversified, not only do they prove to be a productive financial instrument but they also act as credible saving option in the longer run.

It thus comes as no surprise that a number of investors are using mutual funds as a tool to achieve their monetary objectives. Although, there are several types of mutual funds in India, you must be extremely cautious before you decide which one to pick. A fund should ideally match your specific needs, while being able to actively deliver the best possible returns.

This is why it is pivotal to thoroughly understand the various types of mutual funds in India today and how their precise advantages and disadvantages can affect your portfolio.

Funds Based on Asset Class

On the basis of asset class and structural composition, mutual funds can further be subdivided into:

  • Equity Funds– These funds are basically invested in the equities and shares of companies that are listed in the stock market. They are beneficial for the investors who want to reap short-term but high returns. However, they are tremendously high-risk and thus, prone to losses.
  • Debt Funds– As the name itself suggests, debt funds are primarily invested in instruments like fixed income assets, government securities, bonds and debentures. Though, these funds are low-risk and safe, they only provide moderate returns and that too, over a long period of time.
  • Hybrid Funds– Also called balanced funds, the hybrids are invested in both, debts and equities in varying proportions. Their essential aim is to balance the risk and reward profiles of both these asset classes. Nonetheless, their success is entirely dependent on the expertise and craft of the fund manager.
  • Money Market Funds– The money market funds invest in ultra-short-term instruments like Treasury bills and commercial papers, which provide immediate liquidity. The risk is low and the returns are moderately high. Their only disadvantage is that they are heavily reliant on market fluctuations and the resultant interest rate variations.
  • Sectoral Funds- These funds are invested in specific sectors like infrastructure, construction, FMCG, real estate etc. The good part is that owing to high diversification, the funds remain protected against any bear runs. Alternately, their returns are greatly variable & performance-oriented.
  • Tax-Saving Funds– The objective of tax saving mutual funds is to help an investor save taxes. Although funds like ELSS enable deductions under the Income Tax act, these tax exemptions are completely conditional upon a certain lock-in period during which money can’t be withdrawn.

Funds Based on Tenure

Based on their tenure, the different types of mutual funds in India, can be categorized into:

  • Open-Ended Funds– The open-ended funds do not have a fixed tenure or a predetermined maturity date. They can be purchased and redeemed throughout the year, without any definite timeline of expiry. However, they have to bought only at the net asset value (NAV) which is prevalent during that time. If it is high, the funds might not reap commensurate returns.
  • Close-Ended Funds– On the other hand, close-ended funds have to function in accordance with a strict timeline and a fixed maturity date. Their purchase and redemption, both have to be made within the designated period. These funds are listed on the stock exchange and they usually offer good returns provided the capital remains locked in, until the end of the prescribed time interval.

Funds Based on Investment Objective

A plethora of different types of mutual funds in India are classified on the basis of what the final objective of a certain investment is. These include:

  • Income Funds– These funds are fundamentally designed to provide the benefits of a regular income to the investors. They consist of fixed income assets like debentures and bonds. Nonetheless, any sort of inflation casts a grave impact on them and makes their consistent management an expensive affair.
  • Growth Funds– The growth funds are primarily meant to facilitate long-term capital growth and appreciation. To achieve this goal, they pick the schemes which assure a high principal growth. This helps them generate good returns, but it also makes them risky. More so, the prospect of profits being diluted is quite high.

The Road-Map Ahead

Apart from the aforementioned, options like global and international funds are also open to investors. However, these funds are subject to the political and economic risks of their country of origin over which an investor can have no control.

If you are looking for secure and reliable funds to invest in, it would be wise to make use of online platforms like Oro Wealth. Not only will they help you make an objective comparison between the various types of mutual funds in India, but they would also enable you to successfully navigate this rocky financial terrain.

Owing to their sheer diversity, mutual funds are most likely to be a desirable investment destination in the future as well. This is precisely why it is important to understand what they truly entail and tap into their potential of providing steady and sustainable yields.You can know more about the different types of mutual funds by clicking here https://orowealth.com/insights/blog/different-types-of-mutual-funds/

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