It is easy to be led astray by the plethora of choices available and this cana major setback in the investing world too. In case of Mutual funds, a wrong step at the beginning would mean a wrong investment. Understanding which type of mutual fund suit you best will help you avoid any such mistakes. Here are the essential mutual fund classification that will help you choose the best plan for your investment profile.
Choose the mutual fund(s) that suit you best based on the categories available
There are many ways to classify funds, which can decide which fund will suit you the best as an investor. It could be done on the basis of liquidity (open and close-ended), asset allocation (equity, balanced, commodity) or maturity profile of the underlying investment (liquid, income, gilt, equities, etc.). Here are the most popular funds, so you can start on your investment fully prepared!
Liquid / Ultra Short Term Plans – For those seeking liquidity
Think of Liquid or Ultra Short Term funds as better than a savings account at the bank. They have a very short investment horizon. These funds have very low-interest rate risk but they do come with credit risk. Most investors use this to take advantage of the accrual interest.
Short Term Plans – To fulfill short term goals
Short Term Plans associate with instruments that the liquid funds invest in, the only difference being its higher maturity profile. Investors use this fund to achieve short term goals since their investment horizon is between 3 months and a year. It carries both credit and interest rate risks. Investors use this plan to take advantage of the accrual interest and the capital gain.
Gilt Funds – For low credit risk seekers as government never defaults
This is where things get interesting. Income Funds mostly invest in some corporate bonds along with Government Securities. These funds are for the go-getter investor since it has a steep yield curve. But be careful because interest rates and bond prices have an inversely proportional relationship, which means when the bond prices go up the interest rate falls. Investors use this plan to take advantage of the accrual interest and the capital gain.
Balanced Fund – For those wanting both debt and equity exposure
Balanced funds are named so because they invest in both equity and debt thereby balancing your asset allocation. Balanced funds are your best bet at beating all the major investment risks – income tax, interest rates, market volatility, inflation and asset allocation. Investors use balanced funds to earn good returns during a bull market and to stabilize their portfolio in the event of a bear market.
Equity Funds – For aggressive risk seekers
Equity Funds invest entirely in the stock market. Equities normally give higher returns when compared to fixed income since equity is growth capital. However, timing is key when it comes to investing in the equity market. It also takes some courage to buy during a cyclical bottom and selling during a structural top. The best strategy may be to invest in the low-cost passively managed index funds because they normally beat the more actively managed funds.
Gold Funds – For those looking to enter gold market
Gold funds and ETFs offer the ease and safety of accumulating gold in an electronic format. They also offer tax benefits since they are not subject to ‘wealth tax’. However, since gold itself is a speculative commodity with limited industrial usage; whose value depends on the value of US Dollar, real interest rates in the US which in turn depend on nominal interest rates and inflation over there and then the value of Indian rupee against the US Dollar.
International Funds – For those wanting geographical diversification
Recently there have been a lot of international funds that are on offer such as the feeder funds. Indian Fund house collect funds from Indian investors and invest in these international funds. However, given how difficult the Indian markets are to predict, the international market is harder still. Also, in terms of the pure returns from these funds, currency plays a major role. This means, if the Indian rupee is weaker against the Dollar, the returns will be higher!