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What are the Different Types of Mutual Funds

17 Jul 2023

The majority of individuals, today, have considered their financial future at some point or another in their lives. This is not wrong to do as you have to plan your future, and guarantee some form of financial security. Various financial objectives about your future may strike you, such as planning for your retirement, your children’s education, health expenses, holidays, and more. 

To fulfil each aim in your life, you probably have different budgets and time periods. Hence, every individual’s investment aims vary, and different goal achievement may require different kinds of investment. For finance, for most people, retirement corpuses are aimed at acquiring a large amount of wealth. One way to meet your financial goals is to invest in mutual funds, and different kinds can help you to achieve a diverse set of financial objectives. 

What is a Mutual Fund?

Before you dive right in and invest in mutual funds, you may want to get a firm grip on your understanding of the concept of mutual funds. There are types of mutual funds you can invest in, depending on your range of needs, but generally, you should know how a mutual fund product works. Best defined as an investment instrument into which several investors combine their wealth for earning profits, a mutual fund makes gains over a period of time. Therefore, a mutual fund is a corpus of wealth that is invested in any underlying asset, such as debt funds, equities, commodities, gold, etc. A professional fund manager operates a mutual fund. As wealth is pooled in by many investors, losses and gains are collectively experienced when you invest in mutual funds. Returns are earned (or lost) in proportion to your contribution in the mutual fund. 

Types of Mutual Funds

Types of mutual funds that are available for investment are broadly categorised into different aspects of investment and the way investment is viewed. Here are the types:

  • Passive Mutual Funds - In a passively managed mutual fund, the fund manager does not play any active role in the way the funds are balanced. These are funds that, by their very design, follow market indexes and trends. 
  • Active Mutual Funds - In contrast to passively managed funds, funds that are active try to beat benchmarks of indexes instead of going along with them. The operation of these funds is highly dependent on the strategies and acumen of fund managers in charge of them. The fund manager will choose stocks and do a rebalancing act to fulfil the objectives of a fund, should a need arise. 
  • Open-Ended Funds - These are funds that allow you to redeem from them or invest at any time.
  • Closed-Ended Funds - Funds that have a stringent period in which investment is permitted are closed-ended funds. Such funds also come with a fixed period of maturity after which the fund does not exist. 
  • Funds Based on Equity - In the top mutual funds, you can decide on your kind of mutual fund investment by choosing the underlying asset that is invested in, and equity is the most popular. Furthermore, equities can be sub-categorised into small-cap, large-cap and mid-cap funds. There are also multi-cap funds to invest in a mutual fund. These categories are largely based on the market capitalization that they invest in. 
  • Debt Funds - Again, based on the underlying asset as debt-based, these types of funds can be long-term, short-term, and medium term investments. 
  • Money Market Mutual Funds - Mutual fund schemes that let you invest in money market products make up this category. However, these have a maturity tenure of a year. 

Delve into Mutual Funds

What can be termed as the best mutual funds to buy depends entirely on your goals as an investor. You will have to do a lot more research when you start investing in mutual funds, or any other financial investment products. When choosing mutual funds, it is important to consider your investment goals, risk appetite, and time horizon. You can use a CAGR calculator to estimate the returns you could expect from different mutual funds over a specific period of time. This information can help you make informed investment decisions.A good place to start would be at a prominent broker like Motilal Oswal, where you can open a Demat account for free and discover many channels for investment. 

Related Articles: Investing in Mutual Funds is Now Easy with MO Investor App | Invest In Mutual Funds Online In 5 Simple Steps |  How to Analyse Mutual Funds for Big Returns | Tax Benefits of Investing in Mutual Funds | Mutual Fund - Need of Financial Plan | Upcoming IPO | LIC IPO

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