Different types of mutual funds in India and how do I choose between them?

We come across the term “mutual fund” very often on TVs, radios, internet etc. Mutual funds have become a talk of the town and investing in them has become a new trend. But what exactly are mutual funds?

About Mutual Funds

A mutual fund is the collection of money from the investors and making the investment on their behalf. In other words, someone else makes the investment with your money on your behalf. A nominal fee is charged for managing the money by the person taking care of your money and making the investments. Mutual funds are the best investment plan for those who want to invest regularly but do not have much knowledge about it. Mutual funds helps them finding a favourable scheme depending on their financial goals and invest accordingly to achieve that goal.

Investing in Mutual Funds

Investment in Mutual funds can either be made directly to through the hired service of some mutual fund advisor. While making the direct investment, you will be investing directly in the direct plan of the mutual fund scheme. On the contrary, while investing with through an advisor, you will be making the investment in the regular plan of the scheme. The procedure of making the direct investment includes visiting the official website of the mutual fund or its authorised branches with required documents. The edge that direct investment has over hiring an intermediate is that your save on the commission and the money invested yields great returns over the period of time. This might include doing all the work by yourself but eventually, you’ll be the lone bearer of the benefits that come along the way.

Types of mutual funds in India

Mutual funds in India are categorised in four broad categories by The Securities and Exchange board of India. These are –

•         Equity Mutual Funds

•         Debt Mutual Funds

•         Hybrid Mutual Funds

•         Solution Oriented Mutual Funds

EQUITY MUTUAL FUNDS

These schemes invest in the stocks directly and can give superior returns. They hold a risk factor in the short term because their results depend on the performance of the stock market. Investors should look for atleast 5 to 10 years long investment horizon to invest in these schemes. Equity mutual funds are further of different types –

•         Large Cap Funds

•         Mid-small Cap Funds

•         Flexi-cap Funds

•         Diversified Funds

•         Thematic Funds

•         ELSS Funds

•         Index Funds

•         Focused Funds

•         Contra Funds

•         Value Funds 

DEBT MUTUAL FUNDS

As the name suggests, the Debt Mutual Funds invest in Debt securities. Debt schemes should be opted to achieve small short-terms goals which are of less than 5 years. They are comparatively safer than equity schemes and provide considerably modest returns. Sub categories of debt mutual fund include –

•         Gilt Funds

•         Income Funds

•         Short Term Debt Funds

•         Credit Opportunities Funds

•         Fixed Maturity Plans

•         Liquid Funds

•         Monthly Income Plans

•         Over-night Funds

•         Ultra shirt duration Funds

•         Low duration Funds

•         Money market Funds

•         Long duration Funds

•         Medium to long duration Funds

•         Dynamic Bonds

•         Corporate Bond Funds

•         Banking and PSUs Funds

HYBRID MUTUAL FUNDS

Hybrid mutual fund schemes invest in both equity and debt mutual funds. They are the combination of both and the selection of scheme should be according to the risk you’re willing to bear. Hybrid mutual funds are divided in sub categories based on their allocation and style of investment.

Popularly known as 'Balanced Schemes', it is being preferred over pure equity schemes by new mutual fund investors. Most new investors are prefer staying on the safer side which makes them choose balanced schemes over more risky ones that might have higher returns.

SOLUTION ORIENTED SCHEMES

Solution oriented schemes provide solution to the situations. In other words, these schemes are made for specific solutions and goals, say, for retirement or child’s education etc. Solution oriented schemes have a mandatory lock in period of 5 years.

It is a good investment scheme for those planning for the future and want to avoid bad decisions at volatile times so that the investment stays secure at least until the lock in period. These schemes offer higher return rates as there is a minimum duration for the investment.

Also Visit: What Are The Best Investments For 3-6 Months?

How to choose between different Mutual Funds?

Choosing the right Mutual Fund investment plan could be a confusing task. To overcome this and choose the best suited plan for your financial goals, 4 approaches has been laid down. These are as mentioned below –

1.    Top- down approach – This takes the bigger economic picture in consideration and finds the industries and countries which look like that they are going to do well. Investment is then made in specific companies within the chosen industry or country before.

2.    Bottom-up approach – This approach focuses on choosing the companies that are doing well without considering the prospect for the industry or the economy.

3.  A combination of top-down and bottom-up approaches – A portfolio manager decides which countries to favour based on the top down analysis approach but builds the portfolio based on the stocks within each country according to the bottom up analysis approach.

4.   Technical analysis – This approach attempts to anticipate the direction of investment prices by analysing the past market data.

Despite so much awareness about Mutual funds in the market, less than 10% of Indian households invest in mutual funds. As per a report published by Boston Analytics, a research and analytics firm on Mutual Funds Investments, investors are holding back from putting their money into mutual funds because of the high risk factor and lack of authentic information on how mutual funds work.