Mutual funds in India have evolved from niche financial instruments to cornerstone assets in the portfolios of diverse investors, offering a variety of schemes to cater to different investment goals and risk profiles. As vehicles for collective investment, they pool resources from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities, providing a balanced approach to asset management. This introductory guide will explore the spectrum of mutual fund categories available in India, emphasizing how they can serve as a strategic tool for achieving financial objectives, from securing retirement to financing educational aspirations.
Each category of mutual fund is designed with specific investor needs in mind, blending growth potential with risk management to accommodate both the conservative saver and the ambitious investor. As we delve into the types and features of mutual funds, you’ll gain the insights needed to navigate the complex landscape of investment options, making informed choices that align with your financial aspirations.
What are mutual funds?
Mutual funds epitomize the adage that “unity is strength,” demonstrating how collective investments can significantly impact wealth generation. These funds amalgamate capital from numerous investors to form a diversified portfolio, managed by seasoned fund managers who strategically allocate assets to align with the fund’s stated objectives. This approach not only optimizes the balance between risk and reward but also grants individual investors the opportunity to partake in a range of asset classes that might otherwise be out of reach.
Investing in mutual funds offers a simplified path to financial diversity, enabling investors to own a piece of a large portfolio of stocks, bonds, or other securities without the need to manage each one directly. Whether you’re a seasoned investor or new to the financial markets, mutual funds provide a practical means to achieve various financial goals, from building retirement savings to funding educational pursuits.
This mechanism of pooling resources and professional management makes mutual funds an appealing option for those seeking to grow their investments while mitigating risks through diversification. The accessibility and convenience offered by mutual funds, combined with the expertise of fund managers, empower even the most novice investors to navigate the complexities of the financial markets with confidence.
Types of Mutual Funds in India
The mutual fund sector in India is rapidly expanding, with numerous educational initiatives by industry bodies to enhance investor knowledge. Despite these efforts, a Boston Analytics report indicates that mutual funds are still overlooked as an investment option by less than 10% of Indian households.
Mutual funds stand out as one of the most adaptable, inclusive, and effortless investment avenues available. They are tailored to meet diverse investment needs through a broad array of fund categories. These categories allow investors to select schemes that align with their risk tolerance, investment amount, objectives, and investment duration, providing a customized approach to asset management.
1. Equity Funds
Equity funds, often known as stock funds, primarily invest in the shares of companies listed on stock exchanges, offering investors a pathway to long-term capital growth through the stock market’s dynamics. These funds are categorized based on the market capitalization of the companies they invest in: large-cap, mid-cap, and small-cap funds. Large-cap funds focus on established industry leaders with substantial market values, promising stability and steady growth. Conversely, mid-cap and small-cap funds invest in smaller companies that, while potentially riskier, offer the possibility of higher growth rates. This structure allows investors to tailor their stock market investments according to their risk tolerance and growth expectations.
2. Debt Funds
Debt funds focus on fixed-income securities like government bonds, corporate bonds, and money market instruments, aiming to provide investors with steady income while preserving their initial capital. These funds are particularly appealing to those who prefer a lower-risk investment option compared to equity funds. Within the debt fund category, there are further subdivisions such as liquid funds, short-term funds, and long-term funds, which are classified based on the maturity period of the investments they hold. This allows investors to choose a fund that matches their specific financial goals and risk tolerance, whether they’re looking for quick access to their money or willing to invest for a longer period for slightly higher returns.
3. Balanced Funds
Balanced funds, also known as hybrid funds, are designed to offer investors the best of both worlds: growth and stability. These funds allocate their portfolios between equity shares and fixed-income securities, blending the potential high returns of stock investments with the relative safety of bonds. The proportion of equity to debt can shift according to the fund’s strategic goals and the prevailing market conditions, making these funds adaptable to different economic climates.
Balanced funds are particularly well-suited to investors who are looking for a compromise between the aggressive growth potential of equity funds and the conservative stability of debt funds. This dynamic asset allocation helps in managing risk while still allowing for growth, making balanced funds an attractive option for moderate-risk investors. The flexibility in asset allocation also means that fund managers can respond to changes in the market promptly, potentially reducing losses in downturns and capturing gains in upswings. This strategic blend appeals to those who may not have the time or expertise to manage multiple funds but still desire a diversified investment portfolio.
4. Index Funds
Index funds aim to replicate the performance of a specific market index, such as the Nifty 50 or the Sensex, by mirroring the composition and proportion of the securities in the index. This approach makes index funds a type of passive investment, as the fund manager does not actively pick or trade securities based on market predictions but rather follows the index. This passive management strategy results in lower transaction costs and management fees, making index funds a cost-effective option for investors.
These funds are ideal for investors who prefer a straightforward, low-cost investment strategy. Index funds offer broad market exposure, reducing the risk associated with individual stocks while providing the potential for consistent, long-term returns aligned with market trends. They are especially suitable for new investors and those looking for an efficient way to gain steady exposure to the financial markets without the need for frequent trading decisions.
5. ELSS or Tax-Saving Funds
ELSS or Tax-Saving Funds, formally known as Equity Linked Saving Schemes, are a popular investment option under Section 80C of the Income Tax Act, which offers the dual benefits of investment growth and tax savings. These funds primarily invest in equity shares, and investors must adhere to a mandatory lock-in period of three years. This requirement not only encourages long-term investing but also helps in potentially increasing the capital value over time. ELSS funds are particularly attractive to individuals aiming to boost their financial portfolio while benefiting from reductions in taxable income, making them a favored choice for those seeking to optimize their asset growth and enjoy tax benefits simultaneously.
6. Sector-Specific Funds
Sector-specific funds, also known as thematic funds, focus their investments on particular sectors or industries such as banking, technology, or healthcare. These funds aim to leverage the growth potential within these specific areas, offering investors the chance to capitalize on emerging opportunities. However, while the prospect of higher returns can be attractive, these funds also involve higher risks due to their concentrated nature. The performance of sector-specific funds is heavily dependent on the fortunes of the targeted sector, making them more volatile.
Investors interested in these funds should thoroughly assess both the growth potential and the inherent risks of the sector before committing capital. This strategic approach allows investors to potentially benefit from sector-specific growth while being mindful of the risks involved.
7. Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are dynamic investment vehicles similar to index funds in that they both aim to mirror the performance of a specific index. What sets ETFs apart is their ability to be traded on stock exchanges, much like individual stocks. This unique feature allows investors to buy and sell units of ETFs throughout the trading day, offering enhanced flexibility and control over investment choices. Additionally, ETFs are known for their high level of transparency, liquidity, and diversification, making them an attractive option for investors seeking an accessible and straightforward way to participate in the broader market movements.
This combination of features makes ETFs a favored choice for both seasoned and novice investors, aligning with a range of investment strategies and goals.
8. Gold Funds
Gold funds offer investors a strategic avenue to invest in gold and related securities, making it easier to gain exposure to the precious metal without the complications of physical ownership. These funds may invest directly in physical gold or in shares of gold mining companies, providing a diverse range of investment opportunities within the gold sector. By investing in gold funds, individuals can bypass the challenges associated with the security and storage of physical gold.
This type of fund is particularly appealing to those seeking to diversify their investment portfolios, adding a layer of protection against inflation and currency fluctuations. Gold funds stand out as a practical choice for investors looking to leverage the traditional safe-haven allure of gold while enjoying the liquidity and convenience of a mutual fund.
9. International Funds
International funds, often referred to as global or overseas funds, offer investors the opportunity to invest in companies located outside their home country. By allocating investments across various international markets, these funds expose investors to diverse global economies and industries, broadening their investment horizon beyond local opportunities. International funds are particularly attractive to those who see potential in the economic growth of foreign markets and are looking to geographically diversify their investment portfolios. This type of fund can be a strategic tool for investors aiming to benefit from global market dynamics while managing the risks associated with investing in a single country or region.
10. Hybrid Funds
Hybrid funds ingeniously blend various asset classes, including equity, debt, and sometimes even gold, into a single diversified portfolio. This mix allows the fund to adjust its allocation between these assets based on prevailing market conditions and the fund’s specific investment goals. Designed to cater to investors with varying risk appetites, hybrid funds aim to strike a balance between growth and stability. They offer the potential for capital appreciation through their equity holdings while aiming to cushion risk with more stable investments like bonds. This versatile approach makes hybrid funds an excellent choice for investors seeking a comprehensive, all-in-one investment solution that aligns with both their growth objectives and risk tolerance levels.
11. Small-Cap Funds
Small-cap funds focus on investing in companies with relatively low market capitalization, often seen as the underdogs of the stock market with substantial room for growth. These funds are particularly attractive for investors looking to tap into the potential of emerging companies that may not yet be on the radar of larger institutional investors. While small-cap funds can offer significant returns, they come with an increased level of volatility and risk, making them more suitable for those with a robust risk appetite and a long-term investment perspective. For investors willing to ride out market fluctuations, small-cap funds present an opportunity to significantly enhance portfolio returns by capitalizing on the rapid growth phases these smaller companies may experience.
12. Large-Cap Funds
Large-cap funds invest in well-established companies with a significant market capitalization, typically representing industry leaders and stable organizations. These funds are known for their relatively lower volatility, making them a safer choice compared to mid-cap or small-cap funds. As they focus on financially sound companies with a proven track record, large-cap funds are ideal for investors seeking stability and consistent returns over time. If you’re looking for a more conservative investment approach with reduced risk, large-cap funds can offer a steady, long-term growth potential, making them an attractive option for those prioritizing capital preservation alongside moderate growth.
13. Mid-Cap Funds
Mid-cap funds focus on investing in companies with medium market capitalization, positioning them between large-cap and small-cap funds in terms of growth potential and risk. These funds offer a promising balance by combining the stability of larger companies with the growth opportunities of smaller ones. While mid-cap funds can deliver higher returns compared to large-cap funds, they also come with increased volatility. As such, they are well-suited for investors with a moderate risk tolerance looking to diversify their portfolios. For those who want to capture growth while maintaining some level of stability, mid-cap funds offer an attractive middle ground.
Types of Mutual Fund Schemes
Mutual fund schemes can be classified into different types based on their organizational structure. These classifications help investors choose schemes that best align with their financial goals, risk appetite, and investment horizon. Below are the primary categories based on the structure of mutual fund schemes:
1. Open-ended
2. Cose-ended
Closed-ended mutual fund schemes have a fixed maturity period, and units are issued only during the initial offering. Once the units are issued, they cannot be redeemed until the fund reaches its maturity date. However, these schemes are listed on stock exchanges, giving investors the option to sell or trade their units before maturity, providing a degree of liquidity. While closed-ended funds offer limited redemption options, they are suitable for investors willing to commit their capital for a defined period, typically targeting long-term growth with the opportunity to exit through the stock market if necessary.
3. Interval Schemes
Interval schemes provide a unique investment structure by allowing investors to buy and redeem units only during specific transaction periods, known as intervals. These intervals typically last at least two days, with a minimum gap of 15 days between consecutive transaction periods. This feature strikes a balance between the liquidity of open-ended funds and the stability of closed-ended funds. Additionally, interval schemes are listed on stock exchanges, giving investors the option to trade their units in the market outside of the defined transaction periods. This makes them an appealing choice for those seeking periodic access to their investments while benefiting from the potential long-term growth of the scheme.
Types of Mutual Funds Based on Investment Objectives
Mutual funds are designed to cater to various financial goals, offering a range of investment options to suit different needs. Each type of mutual fund aligns with a specific objective, helping you achieve your personal financial aspirations. Here are some of the most common investment objectives and their key characteristics:
1. Capital Appreciation (Growth) Funds
Growth funds are designed to help you grow your investment over time by investing primarily in assets with high return potential, such as stocks. These funds focus on long-term capital appreciation, making them ideal for investors looking to build wealth over the years. While growth funds offer the possibility of significant returns, it’s important to note that the value of your investment can experience fluctuations in the short term. Therefore, they are best suited for investors with a higher risk tolerance and a long-term investment horizon.
2. Capital Preservation
Capital preservation funds are designed to protect your initial investment while minimizing risk. These funds primarily invest in safer, more stable options like bonds and government securities. The goal is to offer steady, reliable returns with lower volatility, making them ideal for conservative investors who prioritize safeguarding their capital. While the potential for high returns may be lower compared to more aggressive investment options, these funds provide a sense of security, ensuring your investment remains intact while generating a consistent income stream.
3. Regular Income
Regular income funds are designed to provide investors with a steady stream of income. These funds primarily invest in fixed-income securities such as corporate bonds, which generate income through interest payments. They are ideal for those looking for consistent cash flow, such as retirees or anyone seeking a reliable source of income. While these funds generally carry lower risk compared to equity-based investments, they also offer more stability, making them a great choice for conservative investors focused on generating regular returns.
4. Liquidity
Liquidity funds, such as liquid schemes and money market funds, are perfect for investors looking to park their surplus funds with quick and easy access. These funds primarily invest in short-term instruments like treasury bills and commercial papers, offering high liquidity and minimal risk. They are ideal for short-term investments, where you may need to access your money quickly while earning better returns than traditional savings accounts. If you’re seeking a safe and flexible option for managing temporary cash surpluses, liquidity funds provide a convenient solution with the added benefit of quick liquidity.
5. Tax-Saving
Tax-saving funds, such as Equity Linked Savings Schemes (ELSS), offer the dual benefit of tax deductions under Section 80C of the Income Tax Act, while also helping you grow your investment. These funds primarily invest in equities, giving you the opportunity to enjoy both tax savings and potential long-term capital appreciation. With a lock-in period of three years, they combine the advantages of tax relief with the potential for growth. Keep in mind that while tax-saving funds offer excellent tax benefits, they also come with market risks, so it’s essential to choose funds that align with your financial goals and risk tolerance.
Mutual Fund Schemes Based on Maturity Period
Mutual fund schemes are also categorized based on their maturity period, offering different investment horizons to suit various financial goals. The types of schemes based on maturity period are as follows:
- Open Ended Funds
- Close Ended Funds
- Interval Funds
1. Open Ended Funds
Open-ended schemes offer investors the flexibility to buy or sell units at any time, without a fixed maturity date. This means you can directly engage with the mutual fund for both investment and redemption, providing a seamless experience.
The standout feature of open-ended schemes is their high liquidity. You can easily buy or sell units at prices based on the current Net Asset Value (NAV), which is determined daily. As a result, these schemes are ideal for investors who value convenience and flexibility in managing their investments. In fact, approximately 59% of mutual funds are open-ended, making them the most common type of scheme in the market.
2. Close Ended Funds
Closed-ended schemes come with a defined maturity period, and investors can only invest during the initial launch phase, known as the New Fund Offer (NFO). Once the NFO period ends, no new investments are allowed, and investors can only buy or sell units through the stock exchange.
The market price of units in a closed-ended scheme can fluctuate from the Net Asset Value (NAV) due to factors like supply and demand, investor expectations, and broader market conditions. Some closed-ended schemes offer the option to sell units back to the mutual fund through periodic repurchases at NAV-related prices.
In accordance with SEBI regulations, at least one exit route, either through the stock exchange or direct repurchase by the mutual fund, is provided to investors, ensuring flexibility even with the fixed investment term.
3. Interval
Interval schemes offer a blend of both open-ended and closed-ended features. These funds allow investors to trade units at predetermined intervals, giving flexibility while still maintaining a structured investment approach. Units can be traded on the stock exchange, or during specific intervals, they may be bought or sold directly at NAV-related prices.
When considering which scheme to invest in, it’s important to seek personalized advice that aligns with your financial goals. Choose the scheme that strikes the right balance between growth, stability, and income, all while taking your risk tolerance into account. This ensures that your investment works best for your unique financial situation.
Based On Principal Investments
An essential aspect of mutual fund schemes is their distinctiveness in terms of investment strategy and asset allocation. To ensure clarity for investors, these schemes are classified into various categories based on their principal investments. This classification helps in identifying the underlying investment approach and the types of assets each scheme primarily focuses on. By clearly defining these categories, investors can easily choose schemes that align with their specific financial goals and risk preferences.
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Solution Oriented Schemes
- Other Schemes
1. Equity Schemes
The current types of schemes will be transitioned to the new scheme categories. Let’s take a closer look at each type of scheme and how they differ from one another. This updated classification will help investors better understand the available options and select the most suitable schemes based on their investment goals and preferences.
- Large Cap: Top 100 companies in terms of market capitalization
- Mid Cap: 101st-250th companies in terms of market capitalization
- Small Cap: 251st Company onwards in terms of market capitalization
| 1. Multi-Cap Funds | Minimum equity and equity-related instrument investment: 65% of total assets | A multi-cap fund is an equity mutual fund that invests in equities with large, mid, and small capitalizations |
| 2. Large Cap Funds | 80% of total assets must be invested in large-cap businesses’ stock and equity-related products | An equity mutual fund that primarily invests in large-cap equities is known as a large-cap fund |
| 3. Large & Mid Cap Funds | A minimum of 35% of total assets must be invested in large-cap businesses’ stock and equity-related securities
A minimum of 35% of total assets must be invested in equity and equity-related securities of mid-cap stocks |
An open-ended equity mutual fund that invests in both big and mid-cap equities is called the big & Mid Cap Fund |
| 4. Mid-Cap Funds | 65% of total assets must be invested in stock and equity-related products of mid-cap enterprises | An equity mutual fund that primarily invests in mid-cap equities is known as a “mid-cap fund” |
| 5. Small Cap Funds | A minimum of 65% of total assets must be invested in small-cap businesses’ stock and equity-related securities | A small-cap mutual fund is an equity fund that primarily invests in small-cap stocks |
| 6. Dividend Yield Funds | The scheme should primarily invest in equities that provide dividends. A minimum of 65% of total assets must be invested in equity | An equity mutual fund that primarily invests in companies that pay dividends |
| 7a. Value Funds | A value investment approach should be used by the scheme. Equities and equity-related products must account for at least 65% of total assets | An equity mutual fund that employs a value-based investment approach |
| 7b. Contra Funds | The plan needs to employ a contrarian approach to investing. A minimum of 65% of total assets must be invested in stock and equity-related products | A contrarian approach to investing is used by an equity mutual fund |
| 8. Focused Funds | A plan centered on the quantity of supplies (up to 30) A minimum of 65% of total assets must be invested in stock and equity-related products | An equity scheme that invests in no more than 30 stocks (specify the kind of equities the scheme plans to focus on, such as multi-, large-, mid-, and small-cap stocks) |
| 9. Sectoral Funds or Thematic | 80% of total assets must be invested in equities and equity-related products within a certain industry or theme | An open-ended equity plan with the aforementioned theme |
| 10. ELSS Funds | According to the Ministry of Finance’s notification of the Equity Linked Saving Scheme, 2005, the minimum investment in equity and equity-related securities is 80% of total assets | An open-ended equity-linked savings plan that offers tax benefits and a three-year statutory lock-in |
2. Debt Schemes
SEBI has determined a total of 16 debt scheme classifications. From the standpoint of a retail investor, 16 categories is a fairly large number for debt funds given their closeness in risk and returns.
Certain categories, such as Liquid Funds and Overnight Funds, are comparable. The same is true of the ultra-short-term debt fund and money market fund categories.
| 1. Overnight Funds | Investing in overnight securities with a one-day maturity | A debt plan that involves purchasing overnight securities |
| 2. Liquid Funds | Investing in debt and money market instruments that have a maximum maturity of 91 days | A liquid plan |
| 3. Ultra Short Duration Funds | Investing in money market and debt instruments so that the portfolio’s Macaulay duration is three to six months | An extremely short-term debt plan that makes investments in securities having a three- to six-month Macaulay duration |
| 4. Low Duration Funds | Investing in debt and money market instruments so that the portfolio’s Macaulay duration falls between six and twelve months | A low-duration debt plan that makes investments in securities having a six- to twelve-month Macaulay duration |
| 5. Money Market Funds | Investing in money market securities with a one-year maturity | An investment in money market instruments through a debt scheme |
| 6. Short Duration Fund | Investing in debt and money market instruments so that the portfolio’s Macaulay duration falls between one and three years | A short-term debt plan that makes investments in securities having a one- to three-year Macaulay duration |
| 7. Medium Duration Funds | Investing in debt and money market instruments so that the portfolio’s Macaulay duration is three to four years | A medium-term debt plan that makes investments in securities having a three- to four-year Macaulay duration |
| 8. Medium to Long Duration Fund | Investing in debt and money market instruments so that the portfolio’s Macaulay duration is four to seven years | A medium-term debt plan that makes investments in securities having a four- to seven-year Macaulay duration |
| 9. Long Duration Fund | Investing in debt and money market instruments so that the portfolio’s Macaulay duration exceeds seven years | A debt plan that makes use of securities with a Macaulay term longer than seven years |
| 10. Dynamic Bond Funds | Investing over time | A flexible loan plan that makes investments over time |
| 11. Corporate Bond Funds | Minimum investment in corporate bonds – 80% of total assets (only in highest-rated instruments) | A debt plan that mostly invests in corporate bonds with the highest ratings |
| 12. Credit Risk Funds | A minimum of 65% of total assets must be invested in business bonds (i.e., the securities with the lowest ratings) | A debt plan that makes investments in corporate bonds with lower ratings |
| 13. Banking and PSU Fund | 80% of total assets must be invested in bank debt instruments, public sector undertakings, and public financial institutions | A debt plan that primarily invests in bank, public sector, and public financial institution debt instruments |
| 14. Gift Fund | Eighty percent of total assets (across maturities) must be invested in Gsecs. | A debt plan that makes investments in government securities over time |
| 15. Gift Fund with 10-year constant duration | A minimum of 80% of total assets must be invested in Gsecs in order for the portfolio’s Macaulay duration to equal ten years | A debt plan that invests in government assets with a fixed 10-year maturity |
| 16. Floater Fund | A minimum of 65% of total assets must be invested in variable-rate securities | A financing plan that primarily invests in securities with variable interest rates |
3. Hybrid Schemes
Mutual fund companies are limited to six categories under SEBI’s seven-category hybrid schemes, and they must select between aggressive and balanced hybrid funds. In addition, SEBI has finally included an Arbitrage Fund in the Hybrid Fund category.
| 1. Conservative Hybrid Funds | 10% to 25% of total assets should be invested in stock and equity-related products; 75% to 90% of total assets should be invested in debt instruments | A hybrid mutual fund that mostly invests in debt securities |
| 2A. Balanced Hybrid Funds | Between 40% and 60% of total assets are made up of debt instruments, and between 40% and 60% are made up of equity and equity-related securities. Under this plan, arbitrage would not be allowed | 50/50 balanced plan for debt and equity investments |
| 2B. Aggressive Hybrid Funds | Debt instruments make up 20% to 35% of total assets, while equity and equity-related instruments make up 65% to 80%. This category will include the majority of the balanced funds | A hybrid plan that primarily invests in stocks and securities connected to stocks |
| 3. Dynamic Asset Allocation Funds or Balanced Advantage | investment in dynamically managed debt and equity. This category will include all well-known dynamic or balanced advantage funds | A hybrid mutual fund that adjusts its exposure to equities in response to market circumstances |
| 4. Multi-Asset Allocation Funds | invests in a minimum of three asset classes, with each class receiving at least 10% of the total. Investments from overseas will be regarded as a distinct asset class. | a plan that makes investments across three distinct asset classes |
| 5. Arbitrage Funds | scheme that employs an arbitrage approach. A minimum of 65% of total assets must be invested in stock and equity-related products | A plan to invest in chances for arbitrage |
| 6. Equity Savings | 10% of total assets must be invested in debt, and 65% of total assets must be invested in equity and equity-related securities. The SID must specify the minimum amount of hedged and unhedged. The Offer Document may also include a statement on asset allocation under defensive considerations | A plan that invests in debt, equities, and arbitrage |
Solution Oriented Schemes
| 1. Retirement Fund | A plan that is locked in for a minimum of five years or until retirement age, whichever comes first | A retirement solution-focused plan with a five-year lock-in period or until retirement age, whichever comes first |
| 2. Children’s Fund | program that is locked in for a minimum of five years or until the child reaches majority age, whichever comes first | A child investment fund that is locked in for a minimum of five years or until the kid reaches majority age, whichever comes first |
Other Schemes
| 1. Index Funds/ETF’s | 95% of total assets must be invested in securities of the specific index that is being copied or monitored. | A mutual fund that tracks or replicates any index |
| 2. FoF’s (Overseas/Domestic) | 95% of total assets must be invested in the underlying fund as a minimum | A mutual fund that makes investments in other mutual funds is known as a fund of funds |
Types of Mutual Funds Based on Portfolio Management
Mutual funds can be categorized based on how their portfolios are managed. These two types of funds offer different approaches to investment management, catering to varying investor preferences and strategies. Let’s explore these two categories and how they shape the investment process.
Active Funds
Active funds are managed by fund managers who make proactive decisions about which securities to buy, hold, or sell, selecting stocks that align with the fund’s investment strategy. These funds employ various strategies and styles, which are typically outlined in the Scheme Information Document. The primary objective of active funds is to outperform the benchmark index and deliver higher returns. The risk and return of the fund are closely linked to the manager’s decisions and chosen strategy, offering potential for greater rewards but also carrying higher risk compared to passive investment options.
Passive Funds
The portfolio of passive funds, such as exchange-traded funds (ETFs) or index funds, is made to mimic a certain benchmark or index. Since the benchmark index determines the choice of stocks and how they are chosen, the fund manager has little influence on these funds. It is the responsibility of the fund management to carefully and minimally deviate from the index.
Conclusion
In conclusion, mutual funds in India offer a diverse range of investment opportunities to suit various financial goals and risk profiles. From equity and debt funds to hybrid and tax-saving options, each type of mutual fund scheme provides unique advantages for investors. Whether you’re aiming for long-term capital growth, regular income, or tax savings, mutual funds allow you to diversify your portfolio, manage risk, and benefit from professional asset management.
Investing in mutual funds not only provides access to a wide array of securities but also makes investing more accessible and flexible for both seasoned investors and newcomers to the financial market. The various classifications based on investment objectives, maturity periods, and portfolio management strategies ensure that there is a fund suited to every individual’s investment needs.
While navigating through the complexities of mutual funds may seem overwhelming, understanding the different types and their features can help you make informed decisions that align with your financial goals. Whether you’re looking for stability, growth, or tax benefits, mutual funds offer a balanced approach to wealth creation and risk management, making them an ideal choice for a wide range of investors.
Ultimately, the key to successful investing in mutual funds lies in choosing the right scheme that matches your risk tolerance, financial goals, and investment horizon. By doing so, you can take advantage of the professional management and diversified nature of mutual funds, working towards a more secure financial future.
