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Different Types of Mutual Funds
There are different types of mutual funds in the market, some of them include balanced funds where money is invested in a combination of stocks and fixed-income bonds, equity funds where the money is invested only in the shares of different companies, fixed income funds in which the money is invested only in the investment that provides a fixed amount of return, index funds in which the money is invested in stocks that match the main market index, money market funds where money is invested in short-term risk-free securities, funds of funds where money is invested in other funds, global funds where the money is invested in instruments located outside the country of origin and specialized funds where the money is invested in specialized mandates.
A mutual fund is nothing more than a financial product that invests in bonds or stocks or both. The investment money pool is accumulated by investors and managed by portfolio managers. Owning stocks in a mutual fund is like owning a small portion of your favorite stocks like Alphabet (Google) or Facebook.
1 - Active and passive funds
The first classification of mutual fund types is made according to whether the fund is active or passive. The two investment approaches differ in how the manager wants to invest money and generate returns for account holders. Active funds seek to outperform a specific benchmark they have set, such as the SandP 500 or the BSE Sensex. To achieve this, active funds buy and sell stocks, and managers pay attention to factors such as the economy, political situations, and other trends. It also researches stock-specific factors such as ratio analysis, earnings growth, free cash flow to shareholders, and future financial projections, etc.
Passive funds, on the other hand, try to mimic the holdings of a particular index to create similar returns. The manager buys the shares of the index and applies the same weighting. The goal here is not to beat the index, but to get closer to it. Since index funds require less research and other operational activities, the purchase cost is lower than that of an active fund.
In the United States, Vanguard, Blackrock, etc. They mainly only offer passive funds such as Index funds and ETFs. On the other hand, Fidelity, T Rowe Price, etc. offer many active fund seeds.
Over the past five years, passive funds have seen many inflows and their assets under management have increased several times due to lower fees and better performance than active funds.
2 - Equity Funds
Equity Funds are a type of mutual fund investment in ordinary shares of companies listed on the stock market.The risk decreases with an increase in market capitalization.
Diversified Funds – Less risky as the investment is spread across sectors, regions, countries and market capitalizations. The manager of this fund requires more skill and knowledge than any other type mentioned above. It can therefore be difficult to choose the right fund. I will try to explain this to readers in the “how to choose a mutual fund” section.
3 - Fixed income functions (FI)
This type of mutual fund is a bond or debt fund that is a less risky option for investing in the equity fund. The mutual fund manager invests in these securities and receives consistent cash payments.
Government Bond Funds or Gilts– Low risk fund in this group. Invest in government bonds such as treasury bills, notes or gilts, etc.
Money Market Funds Low-risk funds that invest primarily in treasury bills. A return will be lower than other types of FI funds, but the risk of losing money is also negligible.
4 - Balanced Funds
These types of mutual funds are called hybrid funds. The portfolio holds both equity and debt securities. The primary objective is to achieve capital appreciation and generate income for investors. A typical balanced fund invests 60% in stocks and 40% in fixed-income securities.
5 - Alternative Funds
These types of mutual funds are an unconventional investment vehicle, unlike stocks and bonds. Institutional and wealthy investors
mainly use this type of FCP. Due to its complex nature, individual investors are not encouraged to subscribe to these funds. AIFs invest in real estate, commodities, derivatives and futures, as well as hedge funds.
