What are the different types of mutual funds?

 A mutual fund is a pool of money managed by a professional fund manager. It is a trust that collects money from many investors who share a common investment objective and invests it in equities, bonds, money market instruments and/or other securities. In simple terms, it involves many people pooling their money together and investing in the stock market or investment schemes. In this way, your money is collectively invested in a mutual fund and any profit that is made is distributed among all the investors

There are the following types of mutual funds to meet the different needs of different people:

Equity or Growth Funds: These funds usually invest in shares of companies and their main objective is capital formation. These can be ideal for long-term investments.

Income or Bond or Fixed Income Funds: These funds invest in fixed income bonds, such as government securities, bonds, and bank certificates. These are safe investments and can be suitable for income generation.

Hybrid Funds: These funds invest in both equity and income, which can provide growth prospects as well as income generation.

Apart from these mutual funds, there are different types of funds, which help meet the various needs of investors. Let's know about them in detail.

Types of Mutual Funds

Depending on your investment portfolio, mutual funds can be of many types. SEBI has classified them into the following 5 categories:

1. Equity Mutual Fund

In equity mutual funds, most of the money is invested in shares. In these schemes, the fund manager has to invest at least 65% of the amount in shares, while the remaining money can be deposited in bonds or banks. This has the potential to earn more, but it carries more risk.

As per the Income Tax Act, 1961, equity fund income is not taxed as long term capital gains when invested for a long period of time, while short term capital gains are taxed by adding them to your income.

2. Debt Fund

A debt fund invests primarily in bonds and corporate fixed deposits. A debt fund mandates investing at least 65% of the money in bonds or bank deposits. These have low risk but also have potential for profit. Debt funds are a type of mutual fund that generates returns by lending your money to the government and companies. The lending period and the type of borrower determine the risk level of the debt fund.

3. Balanced Mutual Fund

Balanced mutual funds invest money in both stocks and bonds. Stocks offer higher returns but are riskier, while bonds are safer but have lower returns. The objective of these funds is to provide better returns with safety, but they are not like equity and debt funds. In these, money is invested in shares and bonds in a balanced manner.

4. Tax Saving Mutual Fund | Equity Linked Saving Scheme (ELSS)

This fund is a way to save tax. It locks the money for at least 3 years and provides tax exemption under Section 80C of the Income Tax Department. The money invested in ELSS is mainly invested in shares, which has the potential for good returns, but there is also risk involved here.

5. Index Fund

Index Fund is a type of equity fund in which money is invested in shares, but its specialty is that this investment depends on the reaction of the market index. It is invested in market indices like Sensex, Nifty, CNX-200, CNX-500, which are based on the charts of shares of certain companies. This does not require much experience for investors and they invest according to the market structure. Its investment management fee is very low, which helps investors save tax. To buy an index fund, you can buy it through a mutual fund agent.