Types of Mutual Fund Based on The Nature of Investment

 ‘Half-knowledge is worse than ignorance’ -Thomas B. Macaulay

Before making any kind of investment in mutual funds, it becomes very important to have in-depth knowledge of its types and what each of them has in store for investors. The investment objective is the deciding factor in any portfolio of a mutual fund scheme.

For example, an investor Akshay wants to invest in an equity fund so as to obtain capital appreciation via investment, whereas another investor Anjali wants to opt for the hybrid mutual fund so as to diversify the risks. So, the portfolio which will be prepared by the fund manager in both cases will be different, owing to the difference in their investment objectives.

Let us now move ahead and have surficial knowledge about the types of a mutual fund based on the nature of the investment. The types are mentioned as followed- 

1.  Equity fund - Funds that usually invest the pooled money in equity shares of a company are known as equity mutual funds. The securities of equity mutual funds are listed on the stock exchange.

Some examples/ types of equity funds include- Market segment-based funds, sector funds, thematic funds, strategy-based schemes, dividend yield schemes, value funds, growth funds, etc. 

2.  Debt fund- Debt is a term used to depict the money borrowed by one party from another. The investments made in debt securities namely treasury bills, Government Securities, and Debentures are known as Debt funds.

Some examples/types of debt funds include Gilt funds, corporate bonds fund (on the basis of the issuer); liquid schemes, short-term debt schemes (on the basis of tenor); diversified debt funds, Junk bond schemes (on the basis of investment strategy), Overnight fund, Low Duration fund, etc.

3. Hybrid funds- Hybrid funds are basically those funds that invest in a combination of various asset classes such as stocks, cash, debit, and bond. They are often known as Balanced Funds.

Some examples/types of the same include- Debt oriented Hybrid Funds, Monthly Income plans, Capital Protected Schemes, etc. 

4) Solution-oriented Fund Schemes- The investment options which cater to the need of an investor in terms of specific goals are known as Solution-oriented fund schemes.

Here, the specific goal can be aimed at retirement planning, higher education of children, etc. Some examples/ types of the same include Retirement fund, Children’s fund, etc.  

OTHER SCHEMES-  

1. Index Funds- Often called exchange-traded funds are funds that tend to follow pre-set rules in order to keep a track of a specified pool of underlying investments.  

2. Fund of funds- Also known as an overseas or domestic fund, is basically a basket of funds that invest in other funds.  

3. Real Estate Fund Schemes/ Real Estate Investment Trusts-

●      Real Estate Mutual Fund- invests directly in assets of real estate, according to the rules and regulations specified by SEBI.

●      Real Estate Investment Trusts (REIT)- invests in assets of commercial real estate. These are mainly trusts that are legally registered with SEBI.

●      Infrastructure Investment Trusts (InvIT)- are trusts which are registered with SEBI and are known to invest in the infrastructure sector. 

Want good returns? Learn about ELSS

 As working individuals, it is amicable if you think about savings, as this entity usually proves helpful in times of need or for future needs as well. According to some experts among the tax-saving options available equity-linked savings schemes or ELSS is that type of mutual fund which tends to offer an outstanding combination of a good return, short lock-in period as well as highly flexible scheme. 

As a matter of fact, this type of mutual fund forms the top choice for investors. 

What is ELSS? 

The mutual fund scheme that is diversified in nature and enables dual tax saving, due to the growth potential of equities, is termed as ELSS. This mutual fund scheme basically invests in stocks, but it differs from other tax-saving options in the sense that a shorter lock-in period of 3 years is associated with it. 

If you are a first-time investor then equity-linked saving is an excellent option to opt for because it provided two major benefits namely, tax saving and wealth creation. 

Point to remember- If you decide to invest in ELSS, then you must have knowledge about a very important mandate associated with it. As per Section 80C of the Income Tax Act, if you make an investment up to ₹1.5 lakh per annum in ELSS, then you are eligible for income deduction. 

This further implies that you can subtract the amount you decide to invest in ELSS from your all-over income, so as to reduce your taxable income. This ultimately leads to a reduction in the tax amount you need to pay. 

Example- Let us elaborate on the concept of ELSS with a real-life example. Consider a person named Ankita who works as a chartered accountant in a reputed firm and earns a taxable income of ₹18 lakh per annum. This puts her into Tax bracket of 30%. Further, she decides to invest ₹1.5 lakh in the ELSS fund. 

Now, as per Section 80C of the Income Tax Act, she is left with a taxable income of ₹16.5 lakh and on the other, she will also be saving the money she decided to invest in the ELSS fund.

Advantages of investing in ELSS fund-

• It offers a shorter lock-in period of 3 years.
• It is a perfect tool for wealth creation because it invests in inequities.
• There is no upper limit as to how much you can invest in this fund.
• Provides better-tax returns.
• Investing in ELSS comes with no complications and is very simple.