Mutual Funds 101: Know Your Funds

Given the rage surrounding mutual funds, one would expect almost every third household to invest in them. Surprisingly though a very small percentage of Indians consider mutual funds a part of their investment portfolio. One of the main reasons often cited is the lack of understanding of mutual funds.

So, in this edition, we are going to clear this fog and take you through the various types of mutual funds available in the market and their associated risk quotient.

1. By maturity period

• Open-ended funds: These are the most common type of mutual funds available. They offer investors the flexibility to enter and exit the fund as per their convenience. In such a fund, there is no restriction on the number of shares, investors or fund size, unless the fund manager so decides. The net asset value (NAV) of an open-ended fund is calculated every day at the time close of market.
• Close-ended funds: These funds have a fixed maturity period of 3-6 years. You can invest in this scheme only at the time of its initial public offering. If you want to invest in it later, the option available is to buy or sell the listed units via a recoginzed stock exchange.
• Interval funds: These funds are a blend of open-ended and close-ended funds. You can invest in these funds via the stock exchange or whenever they are made available for sale or redemption. 

2. By nature

• Equity/growth funds: These funds are considered risky funds as the major chunk of the corpus is invested in equity and equity-related securities. However, they give you exposure to diverse industries so as to mitigate the risk. They are suitable for long-term investors who are open to taking risk. They can be sub-classified as follows:

• Debt/Income funds: These funds majorly invest your money in bonds, debentures, government securities (gilts) and money-market instruments. Given their investment profile, they are seen as “safe funds” as investors benefit from stable income and low risk. So, if you are looking for moderate growth with capital security, you should consider this option. They can be further sub-classified as:

• Balanced funds: These funds invest in both equity and debt funds, as per the scheme’s investment objectives. They give you the best of both worlds: you get to reap riches offered by equity funds while receiving a regular monthly income. Usually, their investment pattern is to invest about 60% in equity and 40% in debt funds.