Types Of Mutual Funds To Invest In 2021

07 August 2021

If you are looking to invest in mutual funds but aren't sure how they work, your search ends here. Today, I will tell you all about the different types of mutual funds and their investment.

All individuals should invest some part of their investments in mutual funds. Mutual funds are today one of the easiest and most flexible investments in the market. They efficiently diversify your portfolio based on your financial goals. Although it is essential to know the basics of the financial markets while investing in mutual funds, several market experts at MFonline can help you understand how your investments work. First, however, let us learn about the different types of mutual funds available in the Indian financial markets to help you make informed investment decisions.

Equity Mutual Funds

Equity funds are funds invested in the Indian stock market. And as you must know, the stock markets have many stocks, from the riskiest to the most stable or the ones with the highest market capitalization to those with the lowest market capitalization. The lower the market capitalization of the stocks, the more volatile they can be, and that is why the market is divided into four segments based on their market capitalization. These segments are called large-cap, mid-cap, small-cap, and penny stocks.

However, it is essential to remember that equity-based mutual funds do not usually invest in penny stocks due to their high volatility. Instead, a large part of the fund is generally invested in large-cap stocks and then lesser and lesser in the mid-cap and small-cap. This way, you can make sure your investments are in the hands of some very stable organizations that can provide solid returns in the long run. And the best part about investing in equity-based mutual funds is the expert level monitoring provided by mutual fund managers to ensure you get the best returns.

Sectoral Mutual Funds

Now I'm not sure if you've heard of these, but they are a big part of equity mutual funds. How they work is pretty simple. The fund is invested in one particular stock market sector and performs based on the sector's market condition. There are funds for every market sector, including IT, Pharma, Banks, et cetera.

These funds are riskier than other equity funds because they are limited to one particular sector of the market, and the fate of the fund ultimately depends on the performance of that specific sector. However, with more risk, it also brings in more returns. For example, during the Covid-19 pandemic, mutual funds invested in the pharma sector were booming, but the funds invested in the travel and tourism sector faced huge losses.

Index Mutual Funds

Index funds are the funds that build a portfolio mimicking the stocks in certain stock market indices. The stocks in these indices are some of the best-performing stocks in the Indian financial markets and help understand the country's economic conditions. Therefore, index funds are a good investment for stable returns because a developing country like India has always portrayed an economically upward graph.

However, there are chances of moderate losses if something like the 2008 recession hits the market. But in the long term, it is observed that the Indian stock market always tends to redeem itself after a fall. So with patience, your investments in the index funds are relatively safer.

Equity Linked Savings Schemes

ELSS is an excellent investment for people looking to make a medium-term investment and save tax. The schemes have the shortest lock-in period compared to all other investments that provide tax deductions. Under ELSS, the dividend received is, and the long-term capital gains are tax-exempt up to ₹ 1 lakh.

These schemes have a three-year lock-in period. However, they are managed by the best fund managers in the financial markets, which is why you can rely on them to have the best returns and help you save tax efficiently. However, you have to be ready for the possibility of moderate losses. But in the long term, ELSS is usually a good investment.

Debt Mutual Funds

Debt funds are mutual funds that have debt securities in their portfolios. Debt securities refer to commercial bills, treasury bills, government bonds, Certificates of deposit, commercial paper, corporate bonds, et cetera. These securities have very low to no risk and lesser returns when compared to equity. These securities work based on previously decided interest rates which is the reason for such low risks.

Under debt funds, you have the best financial experts managing your fund and investing your money in securities with the best interest rates. However, there are different types of debt funds that you can invest in based on your budget and liquidity requirements. At MFonline, you have the top market experts who can suggest the best investments to accomplish your financial goals.

Medium and Short Term Debt Funds

These funds are suitable for your medium and short-term goals. Investing in an equity-based mutual fund is not a brilliant idea if you invest for returns in the near future. You see, the equity markets are uncertain and can cause your investments to dive down sometimes during a market crisis. And a requirement for liquidity on a rainy day will lead to losses in equity funds. Investing in debt funds can help you park your funds for the short term and get your money to work for you.

Overnight Mutual Funds

Overnight funds are the funds that have the maturity of one day. Therefore, the interest rate fluctuation is minimum because of the short maturity period. And that is why the fund is considered a safer investment than any other debt fund.

Money Market Mutual Funds

Money market funds are invested in securities that have a maturity period of up to one year. These funds are advisable for those looking to invest for a short period of time in return for stable, low-risk profits.

Liquid Mutual Funds

Liquid funds are debt-based, very low-risk funds that are specially created to provide liquidity. These funds do not have any exit load and are highly liquid. They are safe investments that offer an average of 4-5% returns. Liquid funds are suggested to those who want to preserve a certain amount to be used for emergencies. I would recommend investing your savings in liquid funds to earn stable returns and liquidity.

Hybrid Mutual Funds

Hybrid Funds are the ones that are invested in both equity and debt. Hybrid funds include all types of equity and debt investments and are relatively safe investments. The financial market experts that manage the funds have the ultimate goal of ensuring maximum profits regardless of the securities. These funds are suitable for risk-averse investors who have a conservative approach towards the financial markets.

Arbitrage Mutual Funds

Though these funds are primarily invested in equity, they are considered hybrid funds because they deal in both debt and equity. Under these mutual funds, the profits are gained by looking for arbitrage opportunities. Arbitrage refers to the difference obtained by buying and selling the same security in two different markets. Thousands of investors around the world use this strategy and earn hefty profits for themselves.

However, executing the arbitrage process to gain the best profits requires a keen knowledge of the financial markets worldwide. This is why we have brilliant funds managers that use their skills and get you the best profits through arbitrage. But there are several instances when arbitrage opportunities aren’t always available. In that case, the funds are invested in low-risk debt securities.

Monthly Income Plans

MIPs are hybrid funds that are invested in fixed income debt securities and equity. They are created to generate a regular, steady source of income for the investors through dividends and interests. It is generally suggested for investors looking for a source of monthly income to sustain their lifestyle. Due to the investments in equity, they provide better returns in comparison to debt-based mutual funds, and the investments in debt securities average out the risks involved to generate a balanced, stable income for the investors.

These were the different types of mutual funds that you can invest in for the best returns. Though I am sure you must have understood how all the funds work, you can always contact the mutual fund experts at MFonline for the best advice and guide you throughout your investment process. For some information on goal-based mutual funds, click here.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.