What are the 3 Main Types of Mutual Funds?
Mutual funds are one of the most sought-after investment options in the financial markets. They are generally categorized into 3 basic types, i.e. equity funds, debt funds, hybrid funds. Such distinction is made based on their characteristics- liquidity, assets invested in, nature of securities owned, associated risks, etc.
While equity mutual funds are similar to equity stocks, fixed income mutual funds concentrate on corporate bonds and other securities that earn a regular income, and money market mutual funds deal in securities with high liquidity. Each has its different returns, associated risks, and separate lock-in period. We have tried to explain them in the following points for your better clarity:
1. Equity Funds
As the name suggests, these funds deal with the investment in funds of publicly traded equity shares. They are also credited with generating better returns than term deposits or debt-based funds. However, owing to the high volatility of the capital market, such funds often have higher associated risks than the other two options. Such funds participate in various equity shares of corporates operating in different sectors to minimize the underlying risks. There are various sub-categories of equity funds, some of the popular ones are- growth funds, income funds, and index funds. Each has its investment objectives and characteristics.
2. Debt Funds
The objective of debt funds is to earn a safe and fixed amount of returns on their investments. They invest significantly in fixed-income securities like corporate bonds, government securities, and debentures, etc. These securities invest in secured debt funds which provide a steady fixed income to its investors. By investing in relatively safe avenues, the investor can lower the risk factor in investment. The reward on such securities is pre-stated and fixed. Generally, the return received on such secured funds is often lower than returns received on equity stocks but so is the risk. They are often suitable for people who have a low-risk appetite and want to earn a steady income.
3. Hybrid Funds
Hybrid means ‘anything made by combining two different elements’. Such hybrid mutual funds are a mixture of equity and fixed income mutual funds. These mutual funds create a mixed balance between the number of equity and mutual funds. This not only creates a balanced risk exposure according to the set financial objectives but also provide lucrative returns on the investment. These funds are often tailored according to the pre-determined needs of the investors so that they can reach their individual financial goals.