Different Types of Mutual Funds Schemes and their Benefits
Investing in mutual funds is critical to meeting your long-term goals, but that doesn’t mean you should invest in them randomly. Like with every investment, you must understand the different types of mutual fund schemes. Doing so can help you invest strategically and make the most of your investments.
- Equity funds
One of the most popular types of mutual fund schemes, equity funds primarily invest in equity shares and other equity-related instruments. They are a great way to invest in stocks even if you don’t have any expertise as there are professional fund managers to handle the fund. Equity funds are primarily categorised based on the market capitalisation of the companies they invest in. Hence, equity mutual funds can be:
- Large-cap funds
- Mid-cap funds
- Small-cap funds
The biggest benefit of investing in equity mutual funds is the market-linked returns. Depending on the type of equity fund you invest in and the market conditions, you may earn 12% to 15% returns per year or more over the long term. Hence, equity mutual funds are a great option to focus on for wealth generation and capital appreciation.
- Debt funds
Debt funds are mutual funds that primarily invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, commercial papers, etc. Debt funds are primarily categorised based on the maturity period of their underlying securities and other factors such as the credit rating of the securities. Some of the popular categories of debt funds in the country are:
- Liquid funds
- Ultra-short duration funds
- Short duration funds
- Long duration funds
- Gilt funds
- Dynamic bond funds
Debt funds are ideal when your goal is capital protection. The risk involved in debt funds is significantly low compared to equity mutual funds. They are mutual funds that investors add to their investment portfolio to diversify and hedge risk.
- Hybrid funds
A hybrid fund is a type of mutual fund scheme that allows you to enjoy the best of both worlds – equity and debt. Different types of hybrid funds have different proportions of equity and debt instruments to meet the fund’s specific objective. Some of the types of hybrid funds are:
- Conservative hybrid funds
- Aggressive hybrid funds
- Balanced advantage funds
- Multi-asset allocation funds
- Arbitrage funds
The benefit of investing in hybrid funds is that they offer strategic asset allocation and diversification to balance risk with reward.
A mutual fund for every goal
Based on your goal, you can also invest in several other types of mutual fund schemes. For instance, if you want to add international exposure to your portfolio, you can invest in international funds. International funds, also known as foreign funds, are mutual funds that invest in stocks of companies that are listed on stock exchanges of other countries. Hence, before you begin investing in mutual funds, it’s crucial to know your goal to pick the right type of fund.