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Types of Mutual Funds

written by: Tim Plaehn•edited by: Rebecca Scudder•updated: 5/31/2009

There are various types of Mutual Funds – each with its own characteristics and it is for the individual investor to select the funds that best meet their requirements.

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    People who regularly invest in Mutual Funds are aware that there are different types of Mutual Funds (MF) common types include Equity Funds, Debt Funds and Balanced Funds. Each type of funds utilitizes a particular strategy of investment and concentrates in its core area.

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    Equity funds

    Equity funds, for instance, predominantly invest their corpus in equities with varied composition with respect to different schemes. Some MF make it a point to invest only in established MNCs and Blue Chip companies where the risk element is very low. There are other more adventurous MF that concentrate on high-risk companies that have the potential for tremendous growth potential.

    There are mutual funds that avoid both these extremes and opt for a mixed bag or what may more familiarly be called Diversified Equity Funds. One can also come across MF that specializes in investing in Mid-cap companies or in Sector Specific Funds or in Tax Savings Funds (ELSS).

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    Debt Funds

    The Debt Fund type of MF as the name indicates, choose to invest bulk of the corpus funds in debt instruments. The primary objective of investing in debt funds is to provide steady income to the investors while keeping the risk factor low. Debt funds schemes are of many varieties:

    Gilt Funds for Government issued Securities that very safe; Income Funds that mostly favors debt instruments like bonds, big enterprise debentures and to an extent securities issued by Government; MIP scheme invest largely in debt instruments and partly in equities to have the best of both the schemes; Short Term Plans (STP) invest wholly in short term schemes like Certificate of Deposits (a short term paper) and Commercial Papers (CP); Liquid Funds are aimed at providing quick liquidity while safeguarding capital. These schemes specialize in investment instruments like Treasury Bills and the like.

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    Balanced Funds

    Balanced funds strike a balance between equity and debt funds – thus providing investors safety as well reasonable returns. There are investors who want to take some calculated risks to increasing earnings while not willing to totally invest in equities. Balanced Funds is the right investment for such discerning investors.

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    Open and Closed-ended Mutual Funds

    Some Mutual Funds are structured as open-ended while others are Closed-ended funds. The open-end fund is available to the investor at all times as it is without any prescribed or pre-determined maturity period. Investors can trade in these units at Net Asset Value prices (sometimes above or below which are referred to as Premium to NAV or discount to NAV). Investors favor open-ended schemes for easy liquidity.

    On the other hand, Closed-ended funds have a lifespan which can be as long-drawn as 15 years. Investors can opt for this scheme during the initial public issue and can trade in the units as and when they are listed in the stock exchanges. Once underwritten, closed mutual funds trade on stock exchanges like any other stocks or bonds. Their value is driven by market conditions. As a relief to the investors, there is provision in some close-ended funds for investors to sell the units back to the Mutual Fund through periodic repurchase at the prevailing NAV (Net Asset Value) prices.

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    Other types of funds

    Some investors prefer growth funds that offer capital appreciation over the medium to long- term. Such schemes invariably invest bulk of their corpus in equities and thus the risk factor is more.

    In order to receive regular and steady income, majority of investors opt for income funds schemes. Such schemes generally invest in fixed income securities such as bonds, debentures issued by corporations and securities insured by Government.

    Money market funds or Inter-Bank Call Money Market funds are popular because of easy liquidity, safety of original investment and reasonable income. These schemes utilize the corpus funds by investing in short-term instruments. Treasury Bills and several short term commercial papers come under this category.

    If you refer to individual preferences or look at the options provided by the issuing companies, you will certainly get confused with so many types of funds available in the market. But primarily, you should categorize them under Equity, Debt and Balance, or, Closed-end and Open Mutual Funds.