“Mutual fund sahi hai”- we’ve all heard this catchphrase, right? But do you understand what mutual funds are? If not, don’t worry – we’re here to help. We’ll provide you with a clear explanation of mutual funds, the different types available for investment, and the benefits of investing in them.

A mutual fund is an investment tool that pools funds from multiple investors and uses it to invest in equities, bonds, government securities, gold, etc. Mutual funds are managed by fund managers who specialise in analysing and handling investments. These professionals invest the pooled funds in various financial assets based on the mutual fund’s scheme’s inherent investment objective. In simple terms, fund managers are responsible for making investment decisions on behalf of the investors.

Mutual funds are generally categorised into three groups – based on structure, investment goals, and asset classes. There are various other types of mutual funds as well that we shall discuss in more detail below.

Based on structure, mutual funds are further divided into open-ended, close-ended and interval funds. Here’s an overview of what each type has to offer.

Open-ended Funds: Open-ended mutual funds allow you to invest and withdraw your investment anytime. Meaning, they don’t have a fixed maturity period and are liquid and perpetual in nature. Fund managers generally invest in assets that offer a greater potential for returns.

Close-ended Funds: Close-ended mutual funds have a fixed maturity period. You can invest in these funds only as part of a New Fund Offer (NFO). Consequently, you can withdraw your investment only upon completion of the maturity period. Although these funds can be listed on stock exchanges, their liquidity is generally very low.

Interval Funds: These funds are similar to close-ended funds but combine the features of open-ended funds. You are allowed to purchase or withdraw your investments during a specified transaction period or interval. 

Based on the goal or objective of the investment, mutual funds are further categorised into growth, income and capital protection funds. An outline of each type is given below.

Growth Funds: Growth funds are designed to increase your capital or investment over a longer period, as the name implies. A wealth manager may recommend investing in growth-oriented assets, such as equity funds, which have the potential for higher returns but also come with higher risk. This type of mutual fund may better suit individuals who can handle market volatility.

Income Funds: Income funds aim at providing stable returns to investors. Wealth managers recommend that investors put their money into securities with a fixed income and a predetermined maturity date. The fund manifests gains through interest income and any capital gains resulting from changes in the value of the deposits.

Capital Protection Funds: Capital protection funds are mutual fund schemes that prioritise safeguarding the initial investment amount while providing investors with a chance to earn some returns. They use various investment strategies and financial instruments to achieve this goal and aim to limit the risk of loss, particularly in volatile market conditions. As a result, they are considered less risky than other investment options.

Based on asset classes, mutual funds are further classified into equity, debt and hybrid funds, all of which have been discussed below.

Equity Funds: Equity funds primarily invest in stocks or equity-related instruments to generate capital appreciation. The performance of the units purchased determines the gains and losses. That said, equity funds carry a higher risk due to stock market volatility.

Debt Funds: Debt mutual funds usually invest in fixed-income securities like government and corporate bonds, treasury bills, and other money market instruments. They aim to generate regular income for investors while preserving the principal amount. It is a great option for people looking for low-risk investment options.

Hybrid Funds: As the name suggests, hybrid funds invest in both equity and debt funds, offering a balanced approach to generating capital appreciation and risk mitigation. This investment option is ideal for those willing to take on calculated risk.

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