4 Mutual Fund Categories to Help You Choose the Right One

Confused about how to pick your Mutual Fund? Don’t worry; there is an easy method, which helps you decide on which mutual fund to choose. Mutual Funds can be separated in to four categories and sub-categories depending on your investment preferences. See where your mutual fund fits in. Then pick the one which is suitable to you.

Category I – Based on Risk Appetite

A mutual fund invests in financial instruments that have diverse risk elements. When you decide to invest in MFs, first make sure how much risk you can take. After that, decide on any one of these three funds based on the risks.

Equity Funds: Mutual funds that primarily invest in stocks are called equity funds. The risks are very high and so are the returns. Fund managers invest in equities because it is the only instrument that has the potential to give unlimited profits.
The fund manager lowers the risk of investing in stocks by diversifying the portfolio among high risk companies and low risk companies so that your money is relatively safe. The majority of the ‘Growth Funds’ are Equity Funds.

Debt Funds: These funds mainly invest in Debt related securities such as bonds of corporate entities, government securities etc. These do not have much risk and consequently the returns are rather less when compared to equity funds.
Some of the funds might invest in only government securities, which are highly secure. Others might mix it with equities to give a limited amount of income. Then there are short-term funds, which invest in commercial papers that matures in three to six months.

Balanced Funds: These mutual funds invest in such a way that both income and risk are balanced and the investor enjoys the returns of equities and the safety of bonds and government securities. If your risk appetite is between the both, you could opt for balanced funds.

Category II – Based on Returns

Sometimes we prefer a mutual fund not only for the returns that they offer but also in how they can deliver that returns, which means if you can receive your earnings periodically or after a long lock-in period.

• Steady Income: Some mutual funds give you a steady income over a period. These funds are invested in debt instruments that give a steady flow of returns. This kind of returns will benefit those who are planning an extra income over their salary. It is also suitable for retired people who need to substitute their salary with other source of income.
• Long Term Profit: These mutual funds have a lock in period during which you cannot take out your money easily. The returns are high when compared to Mutual funds providing steady income. This is suited for those who look for a bulk of money after they retire. Such investment also helps those who want to make a big purchase such as land or house in the long run.
• Liquidity Funds: Not all mutual funds have long lock-in periods. There are mutual funds that are highly liquid, which means that you can take your fund any time you need. However the returns are low. These mutual funds mainly invest in commercial papers, call money market, treasury bills etc. Thus these funds are also called Money Market Schemes.

Though the returns are small these funds can be used for the preservation of capital and a safe parking place for your funds for the short term.

Category III – Based on Your Special Demands

We might have unique demands which depend on our investment preferences and conditions. We might be looking for just that service from a mutual fund. Here are some services that mutual funds provide from which you can choose what suits you.

• Tax Saving: Certain mutual funds help you to save on taxes. However this depends on the tax laws existing at the time. Section 88 of Income Tax Act allows Equity linked saving schemes to save on tax.
• Special Sectors: Some of you may prefer some sectors to invest your money to other sectors. There are mutual funds that offer to invest in a specific sector only like chemical, petroleum, pharmaceuticals etc. You can choose the mutual fund that offers your choice of sector. These kinds of funds are more risky because they invest only in one sector. However the returns are higher than diversified funds.
• Not Particular Stock(s), but Market Index: Some mutual funds invest in stocks that are present on a specific index such as BSE or NSE. The amount invested in a stock is proportional to its weight age in the index. This means that these mutual funds perform just as an index performs. You can select the mutual fund that imitates the performance of the index of your choice.

Category IV – Based on Your Transaction Preferences

Mutual funds can be differentiated depending on the way it allows the selling and buying of the units. If you are more concerned on how you can transact the mutual fund units, you can select your preferences.

• Open-Ended Funds: These funds are open at all times and consequently you can buy or sell the units at any time according to your wish. These funds are highly liquid but do not provide the returns you might expect. However it will beneficial in the short term as a safe parking place for your funds.
• Closed-Ended Funds: Mutual funds that have a lock-in period and where investors can only buy units during the subscription time are called closed-ended funds. Investors can either buy or sell the units in secondary market but the price will depend on the market conditions. In addition they can sell it directly to the mutual fund.
• Interval Schemes: These are mutual funds that have the features of both open-ended funds and closed-ended funds.

These categories quite summarize your needs when opting for a mutual fund. Just check in which category your mutual fund belongs. If it falls in the category that you are looking for then you need not waste time pondering over it for so long because time wasted is money wasted in the world of investment.

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