Everything You Should Know About the Different Types of Mutual Funds

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Mutual funds pool in money from many investors and invests it on their behalf across different assets – such as stocks, bonds or other assets. Investors then stand to gain from the returns the mutual funds generates. Mutual funds are the preferred mode of investment for many investors due to their simplicity. But it can be hard to pick one as per your needs due to their sheer variety. For example, Reliance Mutual Fund has nearly 200 mutual fund schemes on offer. Before beginning your investment journey, it is important to know some of their basic features and the wide range of mutual funds on offer in the market.

What are the different types of Mutual Funds?

The different types of Mutual Funds are mentioned below:

Based on structure

Open-ended funds

  • Open-ended funds allow investors to enter or exit from at any point according to their convenience. They can also be repurchased in a continuous manner and are available for purchase and redemption throughout the year.

Close-ended funds

  • Close-ended funds can be purchased only during the initial offer period. These units can be redeemed only during a specified maturity as against open-ended funds where there is no restriction.

Interval funds

  • Interval funds share features of both open-ended and close-ended funds.
  • They offer to buy back a certain number of outstanding shares from shareholders. Buyback of shares takes place around three, six or twelve months of time.

Based on asset class

Equity funds

  • Equity funds invest in the equity shares of companies.
  • They are high-risk funds that provide high returns as well.
  • The primary objective of equity funds is to generate capital appreciation in the medium to long term.

Debt funds

  • Debt funds are invested in debt instruments such as government bonds, company debentures, etc.
  • The primary objective of debt funds is to provide regular and steady income for the investors.

Balanced funds

  • Balanced funds are also known as equity-oriented hybrid funds and are a combination of equity and debt funds.
  • They seek to provide both capital growth and at the same time regular and steady income for the investors.
  • A standard Balanced fund goes by the ratio of 60:40; 60% for Equity and 40% for Debt. There can be fluctuations in the allocation.

Money Market funds

  • Money market funds are also known as Liquid funds. These funds share the same quality of Debt funds; there is a regular and steady flow of income from the investments.
  • These funds look for short-term safe instruments such as a certificate of deposit, treasury bills, government securities, commercial paper etc.

Based on risk

  • Low risk funds
  • Medium risk funds
  • High risk funds

What are the features of Mutual Funds?

  • Professionally managed: Every mutual fund has a manager to allocate funds These fund managers have more than a decade of experience in Mutual Funds and are AMFI (Association of Mutual Funds in India) certified.
  • Diversification: Mutual funds are spread across a wide range of companies or sectors to lower their risk exposure.
  • High Liquidity: These funds are highly liquid in nature – that is, they can be readily redeemed for cash. Mutual fund investors can redeem their holdings and receive their funds after deduction of fees, if any.
  • Net Asset Value: The price by which the investor purchases or redeems his funds depend on the NAV (Net Asset Value) of the fund. It is calculated by the formula:

NAV = (Assets – Debts) / (Number of Outstanding units), where

Assets is determined by Market value of mutual fund investments + Receivables + Accrued Income, and

Debts is determined by Liabilities + Expenses (accrued).

Variants for Mutual Funds

There are two kinds of variants for most mutual fund schemes; Regular Mutual Funds and Direct Mutual Funds. They’re almost the same except for one differentiating factor – commissions.

A Regular mutual fund charges commissions while Direct mutual funds don’t charge any commission.

  • Commissions: The Regular mutual funds pay commission to the broker at every quarter. These commissions come out of your investments. Whereas for the Direct mutual fund, instead of commissions being paid to the broker, they get added up to your investments which can further add up a surplus.
  • This commission can add up to a large value. Suppose X is 40 and he invests Rs 10 Lacs in a Regular fund which grows at 8% a year, (minus 1% commission). By 70 his amount will be Rs 75 Lacs. Had he invested the same amount in Direct funds then it would have become Rs 1 crore!
  • Both have different NAVs: The NAV of the Direct mutual fund is higher than that of Regular mutual fund. NAV of a mutual fund is related to the expense ratio. The expense ratio of a Direct fund is less than Regular fund; because no commissions are paid to the existing brokers.

How are Mutual funds taxed?

Investing in mutual funds can generate capital gains. And these capital gains can get taxed. As an investor, you should be aware of how mutual funds are taxed:

 

  • Holding period:

The tax paid on capital gains depends on the period that the investor holds his investments. The duration can be short-term and long-term.

Funds Short Term Long Term
Equity funds Less than 12 months More than 12 months
Balanced funds Less than 12 months More than 12 months
Debt funds Less than 36 months More than 36 months
  1.   Taxation on Mutual funds:
  • Tax-saving Equity funds (ELSS)

They are called as Equity-Linked Saving Scheme (ELSS). These are long-term investments. ELSS is one of the most popular Sec 80C Income Tax Act tax saving mutual funds. It an equity diversified fund which enjoys capital appreciation and tax savings. This investment has locked in a period of 3 years. You can save taxes up to Rs 45,000 by claiming a tax deduction up to Rs 1.5 Lacs on an ELSS investment every year.

By redemption after 3 years, the long-term capital gains of up to Rs 1 lac can be saved. Any long-term capital gains of more than Rs 1 lac shall be taxed at 10%.

  • Non-tax Equity funds

The tax charged for non-tax equity funds for long-term capital gains up to Rs 1 lac is tax-free. And 10% is taxed for capital gains more than Rs 1 lac. Whereas for short-term gains, for the units redeemed before 12 months, a 15% of tax is charged on the capital gained.

  • Debt funds

Long-term capital gains are taxed at 20%. These long-term capital gains take the duration of 36 months and above. Tax charged on short-term capital gains is done as per tax slab.

  • Hybrid funds

These are equity-oriented mutual funds that hold up to 65% assets in equities. Therefore, their tax treatment is exactly like that of non-tax saving equity funds.

Funds Short-term capital gains tax Long-term capital gains tax
Equity mutual funds 15% 10% in excess of Rs 1 lac
Balanced mutual funds 15% 10% in excess of Rs 1 lac
Debt mutual funds As per tax slab 20%

 

Mutual funds are a safe form of instrument, ideal for investors with varying personal wealth goals. Investors can begin with as low as Rs 500 to Rs 1000 via a SIP (Systematic Investment Plan). They are also useful for investors with limited knowledge due to their simplicity in comparison with equity/stocks from share market.