Mutual Funds

1.Based on asset class:

• Equity Funds:
  These funds invest in stocks of various companies. This investment involves high risk; so, chances of earning good returns are high.
• Debt Funds:
  These funds invest in government bonds, debentures and other fixed-income instruments. The aim is to earn fixed returns. Therefore, Debt Funds come with low risk.
• Money market funds:
  In this type of mutual fund, the money is invested in money market instruments. Money market instruments invest in Commercial Paper, Treasury Bills, Certificate of Deposits, and Repo instruments. These investments are ideal for investors who expect a quick and moderate return from their investments vis-à-vis SB Accounts.
• Balanced or Hybrid Funds:
  Hybrid funds as the name suggests, are invested in a combination of high risk and low-risk assets, in order to balance risk and returns. They invest in a mix of equity and debt to protect your investment.
• Sector Funds:
  These funds only invest in a specific sector like infra, pharma, auto or oil and gas. For example, in case of the infrastructure sector, funds are only invested in companies related to that sector. The risks and returns on such funds are dependent on the performances of that particular sector. These are an extremely risky investment.
• Index Funds:
  These funds try to replicate a specific index like Nifty 50 by investing in the same stocks in the same proportions. They perform in tandem with the index. Therefore, returns are associated with that specific index.
• Tax Saving Funds:
  ELSS are also called tax saving mutual funds. Tax Saving Funds are primarily invested in equity shares. Such investments are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
• Fund of Funds:
  These funds invest in other mutual funds. They have a higher expense ratio.

2.Based on Structure:

• Open-ended funds:
  The units of open-ended funds can be purchased and redeemed at any given point in time. Therefore, there is no restriction on entry and exit from the fund. These units can be encashed as per convenience. Therefore, they are quite liquid.
• Closed-ended Funds:
  Closed-ended funds restrict the entry and exit from the fund. The units of such funds can be purchased only during the initial offer period. They can be redeemed only after the maturity date. These funds are often listed on the stock exchange.

3.Based on investment objective:

• Aggressive growth funds:
  These funds aim to achieve aggressive growth. Investors with an intention of getting very high returns, invest in this type of fund. The risk associated with these funds is quite high. Investors who are not prepared to bear losses shouldn’t invest in aggressive growth funds.
• Growth funds:
  Capital appreciation is the main objective of these funds with little or no focus on dividend payout. Growth funds are a combination of investments in small, medium, and large-sized corporations who reinvest their earnings into expansion, R&D, mergers, and so on.
• Income funds:
  Income funds are invested in fixed income instruments like corporate fixed deposits, debentures, bonds and so on, which give fixed returns. The main aim is not capital appreciation, but to provide a consistent income to the investors. These types of mutual funds are most suitable for retired people who need a fixed income. These funds give dividends on a regular basis. Income funds come with moderate risk. They are also impacted by inflation.
• Balanced funds:
  These funds invest in stocks, bonds and sometimes money market instruments too. The investment mix is fixed based on the risk objective. Balanced funds aim to provide investors with income and the growth opportunity.
• Money Market Mutual Funds:
  The main objective of money market funds is to preserve capital and prevent loss. Investment is done in money market instruments that are very safe, like treasury bills, certificates of deposit, and so on. These funds give decent returns, higher than SB Accounts. Risk associated with such funds is minimal. Money market funds are highly liquid; therefore, investors can modify their investment strategies as and when they wish.

• Resident Indians
• Non-resident Indians (NRIs)
• Parents/Guardians on behalf of minors
• Hindu Undivided Family (HUF)
• Sole Proprietorship Firms
• Partnership Firms
• Persons of Indian Origin (PIO)
• Public Sector Undertakings
• Private Sector Undertakings
• Cooperative Societies
• Charitable or Religious Trusts
• Trustee, AMC or Sponsor of their associates
• Endowment or Registered Societies
• Wakf Boards
• Army/Air Force/Navy/Para-Military funds and other eligible institutions

Investors can apply for a mutual fund, either online or offline. You must ensure that you invest through Association of Mutual Funds in India (AMFI) registered mutual fund distributors, only. Also, make sure that the distributor has a valid AMFI Registration Number (ARN).

You can check if a distributor is AMFI registered or not at https://www.amfiindia.com/. The link also lists the distributors who are suspended from providing mutual fund services. Every employee of a mutual fund distributor is given an Employee Unique Identification Number (EUIN).

Following are the steps to invest in mutual funds:

• Assess your risk profile. Identify if you are risk averse, a moderate risk-taker or an aggressive investor.
• After you identify your risk profile, you have to allocate your funds to different asset classes. Allocate your funds in a mix of both equity and debt. This will help minimize risks and optimize earnings.
• Compare mutual funds that invest in each asset class based on their investment objectives and past performance.
• Once you decide on the mutual fund schemes that you would like to invest, apply online or offline.
• Keep monitoring and following up with the mutual fund manager, so that you get the best out of your investment.

The primary objective of investments is to earn returns. Mutual funds are safe, if you handle them with care.

You should know where and why you are investing. Though your fund manager has been entrusted with the management of your mutual funds, you have to continuously follow up and keep track of the performance of your investments.

It is best to do your homework. Learn and understand about mutual fund schemes before investing.

SEBI Guidelines on mutual funds:

SEBI has drafted certain guidelines on mutual funds by labeling the product through color codes: blue, yellow and brown. These color codes imply the risk levels associated with a particular mutual fund scheme.

Mutual fund color codes:

• Blue: Low risk
  A mutual fund product with blue on the label indicates low risk.
• Yellow: Medium risk
  A mutual fund product with yellow on the label indicates moderate risk.
• Brown: High risk
  A mutual fund product with brown on the label indicates high risk.