Different Types of Mutual Funds and Its Benefits Which You Should Know
Investors are constantly on the lookout for investment options where they park their investments and simultaneously earn substantial returns over time. The primary aim of investments is to either cater to long-term investment goals or create a steady source of income or both. There are various types of investments available to an investor, the most popular being mutual funds. This article will serve as a mutual fund investment guide and cover the top 5 types of mutual funds available to an investor:
- Tax-saving mutual funds
These mutual funds help investors to save on their income tax liabilities. Commonly known as Equity-linked Savings Scheme or ELSS, these funds invest the majority of their corpus in equity and equity-related securities. Section 80C of the Income Tax Act, 1961 allows an investor to avail up to Rs 1.5 lac by investing in ELSS funds. These funds have the lowest lock-in period, i.e. three years as compared to other Section 80C investments.
- Equity funds
Commonly known as stock funds, equity mutual funds invest primarily in the stocks of various companies to generate significant returns. These funds are mandated to invest at least 65% of their total assets in equity shares of several companies in specific proportions. Equity funds are linked to a higher rate of risk as compared to other types of mutual funds. These funds offer investors the benefit of capital appreciation along with regular dividends.
- Debt funds
Debt funds invest in securities that offer fixed income such as government securities, corporate bonds, treasury bills, commercial papers, and other money market instruments. All these instruments have a pre-decided maturity date and interest rate that an investor earns on the maturity of the scheme. The returns on debt mutual funds are usually unaffected by fluctuations in the stock market. Hence, debt securities are measured as low-risk investment options.
- Index funds
An index fund purchases stocks similar to a particular market index. This implies that the scheme is expected to perform in tandem with the benchmark index it tracks. These funds strive to mirror a specific index. Thus, the returns earned on these schemes are similar to the ones produced by the underlying index. Index funds typically have lower costs than actively managed funds as the fund manager does not have to track the market constantly.
- Pension funds
These mutual funds are usually subscribed by investors who have a long-term investment perspective. The main purpose of pension funds is to ensure steady returns by the time an investor retires. Pension fund investments are divided between the equity and the debt market. The equity portion offers higher returns with greater risk. On the other hand, the debt component strives to provide steady returns.
Before investing in mutual funds, an investor must do a thorough analysis of the market and consider their financial goals, risk appetite and investment horizon. You can also take the services of a mutual fund expert. Happy investing!