Mutual funds types are broadly classified on the basis of - investment objective, structure, and nature of the schemes. When classified according to the investment objective, mutual funds can be of 7 types - equity or growth funds, fixed income funds or debt funds, tax saving funds, money market or liquid funds, balanced funds, gilt funds, and exchange-traded funds (ETFs).

Based on the structure, mutual funds can be of 2 types - close-ended and open-ended schemes. When mutual funds are classified on the basis of nature, they can be of 3 types - equity, debt, and balanced. There is an overlap in the classification of some schemes like equity growth funds which can fall under classification based on investment objective as well as classification based on nature.

We have explained some of the types of mutual funds, below:

Growth or Equity Schemes - These funds invest in equity shares and the investment objective is capital gains over medium or long-term. They are associated with high risks as they are linked to the highly volatile stock markets but over long term, they offer good returns. Hence, investors having a high appetite for risk find these schemes to be an ideal investment option. Growth funds can further be classified into diversified, sector, and index funds.

Debt Funds - Also known as fixed income funds, they invest in fixed income or debt securities such as debentures, corporate bonds, commercial papers, government securities, and various money market instruments. For those who seek a regular, steady, and risk-free income, debt funds can be an ideal choice. Gilt funds, liquid funds, short-term plans, income funds, and MIPs are the subcategories of debt funds.

Balanced Funds - These funds invest in a mix of debt instruments and equity shares. Investors can expect a regular income and growth at the same time with these funds. They offer a good investment option for investors who are ready to take moderate risks over medium or long-term.

Tax Saving Funds - Anyone looking to grow their capital while also saving tax can opt for tax saving schemes. Investors can enjoy tax rebates under Section 80C of the Income Tax Act, 1961 through tax saving funds, also known as equity-linked savings schemes.

Exchange-Traded Funds (ETFs) - An ETF trades in a stock exchange and owns a basket of assets such as bonds, gold bars, oil futures, foreign currency, etc. It offers the flexibility of purchasing and selling units on the stock exchanges throughout the day.

Open-ended schemes - In an open-ended scheme, units are bought and sold continuously and hence, allows investors to enter and exit according to their convenience. Purchase and sale of funds are done at the Net Asset Value (NAV).

Close-ended schemes - In this type of scheme, the unit capital is fixed and only a specific number of units can be sold. The units in a close-ended scheme cannot be bought by the investor after the New Fund Offer (NFO) has passed which means they cannot exit the scheme before the end of the term.

The fund value is calculated as per the Net Asset Value (NAV), which is the value of the fund’s portfolio net of expenses. This is calculated after every business day by the AMC.

AMCs will charge you an administration fee, which covers their salaries, brokerage, advertising and other administrative expenses. This is usually measured using an expense ratio. The lower the expense ratio, the lower the cost of investing in that Mutual Fund.

AMCs may also charge loads, which are basically sales charges incurred by the company in the form of distribution costs.

If you are unfamiliar with associated charges, you might get into a position where the profits from your investment are reduced considerably due to overhead expenses. So, it’s a good habit to read the fine print for details on expenses and fees related to a Mutual Fund.

Before you decide to invest in a mutual fund, it is important to keep the below points in mind. Doing so will help you choose the right kind of funds to invest in, and help you accumulate wealth over time.

After you have identified your investment objectives, fulfilled the KYC requirements, and explored the various schemes, you can start investing in mutual funds. A bank account is also a mandate while making a mutual fund investment. Most mutual fund houses will ask for a physical or an online copy of a cancelled cheque leaf bearing the IFSC (Indian Financial System Code) and MICR (Magnetic Ink Character Recognition) of the bank.

There are different ways in which mutual fund investments can be made. They are:

You can invest in schemes of a mutual fund by visiting the nearest branch office of the fund house. Just ensure that you carry a copy of the below documents -

The fund house will provide you with an application form which you will need to fill and submit, along with the necessary documents.

A mutual fund broker or a distributor is someone who will help you through the entire process of investment. He will provide you with all the information you need to make your investment including the features of various schemes, documents needed, etc. He will also offer guidance on which schemes you should invest in. For this, he will charge you a fee which will be deducted from the total investment amount.

Most fund houses these days offer the online facility of investing in mutual funds. All you need to do is follow the instructions provided on the official site of the fund house, fill the relevant information, and submit it. The KYC process can also be completed online (e-KYC) for which you will need to enter your Aadhar number and PAN. The information will be verified at the backend and once the verification is done, you can start investing. The online process of investing in mutual funds is easy, quick, and hassle-free and hence, is preferred by most investors.

Many fund houses allow investors to make investments through an app which can be downloaded on your mobile device. The app will allow investors to invest in mutual fund schemes, buy or sell units, view account statements, and check other details concerning your folio. Some of the fund houses that allow investments through an app are SBI Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund, Aditya Birla SunLife Mutual Funds, and HDFC Mutual Funds. Some apps like myCAMS and Karvy allow investors to invest as well as access the details of all their investments from multiple fund houses, on one platform.

As stated above, mutual funds are professionally managed investment vehicles that will compound your money over a long term. Mutual funds may invest in a variety of instruments like equity, debt, money market, etc., and fetch favourable returns on your investment. There are more reasons why you should invest in mutual funds and we have picked the top ones for you below:

Mutual funds are managed by professional fund managers who research and keep a track of the markets, identify the rights stocks, and buy and sell them at an appropriate time so as to generate favourable returns on your investment. Fund managers also analyse the performance of firms before they decide to invest in their stocks. Also, when you buy units of a mutual fund scheme, the scheme information document (SID) will have the professional summary of the fund manager which includes the number of years of work experience, the kind of funds managed, and the performance of the funds managed by him/her. So, you can be rest assured that your money is in the right hands.

Compared to term deposits such as Fixed Deposits (FDs), Recurring Deposits (RDs), etc., mutual funds offer better returns on your investments by investing in a variety of instruments. Equity mutual funds present an excellent opportunity to investors to enjoy higher returns but at the same time are accompanied with high risks and hence, are ideal for investors with a high risk appetite. Debt funds, on the other hand, offer lower risk and fetch better returns than term deposits.

Perhaps one of the greatest benefits that mutual funds offer is diversification. By investing in a wide range of asset classes and stocks, mutual funds reduce the risk by diversifying the portfolio. Therefore, even if one asset/stock is not performing well, the performance of other assets can balance it out and you can still enjoy favourable returns on your investment. To reduce the risk further, you can diversify your portfolio by investing in different kinds of mutual funds. Seek the help of a financial advisor if you are not sure about which funds to invest in and how to diversify or balance your portfolio.

Investing in mutual funds has been made quick, hassle-free, and simple by many fund houses who offer the online facility of investing. Just by clicking a few buttons, you can start investing in a mutual fund scheme of your choice. Even the KYC process can now be done online and investors can invest up to Rs.50,000 using the e-KYC facility. However, for investments above Rs.50,000, investors are required to complete the physical KYC process.

You can start investing in a mutual fund for as low as Rs.5,000 (lump sum) and Rs.500 for a monthly SIP (Systematic Investment Plan). Therefore, you do not have to wait to accumulate a large sum in order to start investing. Also, if you invest in a Direct Plan of a mutual fund scheme, you do not have to pay any additional commission to distributors or agents.

To cultivate a habit of regular investing, mutual funds offer a facility known as a Systematic Investment Plan (SIP). An SIP allows investors to invest small amounts regularly, the frequency of which can be weekly, monthly, or quarterly. An auto-debit facility can be set up for your SIP where a fixed sum will automatically be debited from your bank account every month. An SIP offers an excellent way to invest regularly and without having to manually invest each time.

Now that you know about the benefits of investing in mutual funds and how to invest in them, start investing and see your wealth grow.