Mutual Fund- Part 2

Types of Mutual Funds ?


Mutual Fund by Investment Objective:

• Equity Schemes: These schemes are known as "high risk, high return". These schemes generally invest a majority of their funds in equities (Shares) and hence are high risk investment. These schemes aim to provide capital appreciation over long term and hence suitable for long term investors. These schemes are NOT suitable for those want regular income or who need money in a short term.

• Income or Debt Schemes: These schemes are known as "less risk, less return". These schemes invest a majority of their funds in fixed income securities like Bonds, Corporate Debentures, Government Securities and money market instruments. These schemes aim to provide regular and steady income and hence for short term investors and retired people. these schemes are NOT suitable for long term investors as there will not be much capital appreciation. 

• Balanced Schemes: These schemes are known as "medium risk, medium return". These schemes invest in both equity and fixed income instruments. These schemes aim to provide capital protection and moderate income. The returns from these schemes may fluctuate based on the interest rates in the market.

• Tax Saving Schemes: These schemes provide tax benefit to investors as per the Income Tax Act. For example, Equity Linked Savings Scheme (ELSS). The aim of these schemes is to provide capital appreciation and tax benefits. These schemes comes with a specific lock-in period. These schemes invest mainly in equities and hence they are high risk oriented schemes.   
• Gilt Schemes: These schemes invest exclusively in government securities. NAVs of these schemes fluctuate due to change in interest rates.

• Index Schemes: These schemes represent the portfolio of a particular index such as BSE Index, NSE (Nifty) Index, etc. These schemes invest in the shares that represent an index. NAVs of these schemes will rise or fail according to the rise or fall in the index.

• Sector Schemes: These schemes invest in shares that are a part of a specific sector. For example, technology sector schemes will invest in Infosys Technologies, TCS, etc. Returns from these schemes depend on the performance of the chosen sector. These schemes are highly risky compared to diversified equity funds.

Mutual Funds by Payout:

• Growth Schemes: As the name implies, Growth option aims for capital appreciation over long term. The number units you bought will remain the same till you sell them. NAV of the scheme will increase or decrease depending upon the performance of the scheme. In these schemes, you will get money only when you sell the units. These is suitable for those who expects a growth over long term and those who is not in need of money during short term.

• Dividend Payout Schemes: Dividends are nothing but the profits made by the mutual fund scheme. This schemes pays out the dividend to investors from time to time. But, the amount and the frequency of dividends are not guaranteed. The number units will remain the same but the NAV of the scheme comes down after the dividends are declared. This is suitable for  those who expect to receive  income flow on a regular basis.