Mutual funds are an investment bucket where investors collectively pool their money to earn profits on their invested money over a period. There are numerous types of mutual funds for example open-ended mutual funds, close-ended mutual funds, equity funds, debt funds, etc. All the funds are managed by professional investors also known as fund managers or portfolio managers. The fund manager’s job is to invest already pooled money in different securities such as stocks, gold, bonds, and other assets to earn the highest possible returns on the capital. All the profits or losses are distributed among all the investors in the ratio of their investments. In this article, we will discuss about mutual funds and different types of mutual funds.

Advantages of mutual funds

There are numerous advantages of investing in mutual funds. Here are some important ones-

1. Returns 

One of the biggest advantages of investing in mutual funds is high returns. It provides you with an opportunity to earn the highest possible returns than your traditional investments options that offer you assured returns. Mutual funds are directly linked to the market’s performance. This means if the market goes up in a bull run and does well, it will positively impact your funds. However, if the market performs poorly, it will impact your funds negatively. Unlike, traditional investments mutual funds consist of lots of risks therefore do your own research before investing in mutual funds.

2. Professional expertise 

Any kind of investment requires time to do research in the market before investment and skills to understand the market. But if you don’t have the skills or the time to have deep knowledge of the market, mutual funds could be the best alternative for investment. Here, mutual funds provide you with professional managers who help to invest your money in the best possible way and help you earn reasonable returns. And the professional managers will charge a specific amount of fees for their services.

3. Diversification 

This is another important advantage of mutual funds it gives instant diversification. If you invest your money only in one asset and if the market crashes, you will end up losing your hard-earned money. If you are dealing with stocks investment only and had to diversify your investment, you would have to buy more stocks from other sectors it may take more time and requires a lengthy process. On the other hand, when you invest in mutual funds, you receive immediate diversification. For example, if you buy a mutual fund that follows the BSE Sensex, you would have access to up to 30 securities from various sectors. This might significantly lower your risk.

4. Tax benefits 

Mutual funds investors can save up to 1.5 lakhs by investing in Equity-linked savings schemes (ELSS). The Lock-in period in ELSS is 3 years which means that you can not withdraw your investment before 3 years, according to section 80C of the Income Tax Act. It also helps you save tax when you invest in debt funds. Different types of mutual funds have different tax advantages.

Different types of mutual funds 

There are different types of mutual funds and each type of fund aims to achieve a different goal. Following are the most popular types of mutual funds;

Mutual funds based on assets class:

1. Equity funds 

Equity funds are invested in stocks and have high risk because they are linked with market performance. If the market does well it will give you appreciable returns, if the market goes down you have to face losses. Although these types of mutual funds have a high risk, if you can take that risk, you can earn reasonable returns.

2. Debt funds 

Debt funds are invested in government securities and company bonds. Such funds have less risk and give reasonable returns on your capital. If you are planning long-term investment and also want a steady income source then these types of mutual funds could be the best option with minimal risk.

3. Hybrid funds 

Hybrid funds are a combination of equity funds and debt funds. If you want to invest in both funds, equity, and debt funds, hybrid funds are the best option for you. Hybrid funds are further divided into various categories.

Mutual fund based on structure:

1. Open-ended mutual funds

In these types of mutual funds, investors can buy and sell their funds at their convenience on any business day. These funds are highly liquid there is no lock-in period for buying and selling. There are meant for short-term investment.

2. Close-ended mutual funds

These types of mutual funds already have a pre-defined maturity period. They are less liquid in nature investors cannot be bought and sold these funds on any business day. They can only buy when funds are launched and sell only at the time of maturity.

Mutual funds based on investment objective:

1. Growth funds

The primary purpose of growth funds is capital appreciation. These types of mutual funds invest a large amount of their funds in inequities. Because of their significant equity exposure, these funds are riskier, thus it’s best to invest in them for the long term. 

2. Income funds

As the name implies, income funds seek to provide investors with a consistent source of income. Debt funds invest primarily in bonds, government securities, and certificates of deposit, among other things. These types of mutual funds are appropriate for a variety of long-term objectives and investors with a reduced risk appetite.

3. liquid funds 

Liquid funds invest in Treasury bills, Certificates of Deposits (CDs)^[1], term deposits, commercial papers, and other short-term money market products. Liquid money can be utilized to hold surplus cash for a few days to a few months or to begin an emergency fund.

4. Tax evasion funds

You can gain tax advantages from tax-saving funds under Section 80C of the Income Tax Act. If you invest in these types of mutual funds, you can claim up to Rs 1.5 lakh in deductions each year. The Equity Linked Savings Scheme is an example of a tax-advantaged fund (ELSS).

Conclusion 

Investing in the abovementioned types of mutual funds are the best alternative then traditional investments, mutual funds have lots of advantages and give lots of options for investment to investors. Mutual funds also provide professional help which helps you to earn appreciable returns. Consult an expert for investment in mutual funds you can reach an expert at bizadvisor.io for professional help.

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